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Latvia needs a New Deal

For its economic problems, Latvia cannot catch a break.

After passing one of the tightest post-Soviet budgets for 2010 in early December, the Constitutional Court will add further strain to the Latvian economy. The country’s highest court ruled last week that the government’s cutting down pensions violated a basic human right to social security.

In July 2009, the government cut pensions by 70 percent for those still working and 10 percent for all else. With the ruling not only does the government have to restore the previous pension levels by March 2010, but it also has to pay back lost pensions from when the cuts began. Compensation, to be made by 2015, is estimated at 100 million lats (€141 million).

That is good news to the elderly, especially those who rely on the payments as their sole source of income. Every country has an obligation to protect its citizens, and pensioners are among a society’s most vulnerable groups. Tough economic times are no excuse for mistreating the senior population.  The ruling is just, on principle.

But just or not, the ruling will not spare Latvia from bleaker times ahead. Even with the economy expected to shrink 18 percent in 2010 and unemployment holding at a whooping 20 percent, Latvia already had to pass several tax hikes and spending cuts. Now the government will have to brainstorm how to pay an additional 20 million LVL for each of the next 5 years (100 million lats in total). In all likeliness, the budget will need to be revised and more tax raises and/or spending cuts in other sectors could be in store.

The additional budget strain could affect the €7.5 billion loan Latvia received from the International Monetary Fund and European Union starting in late 2008. Loan conditions require Latvia to reduce its deficit by 500 million lats next year; the IMF and EU were satisfied with the December budget and approved the next loan payment installment. With the new development, nothing is certain.

Two turns of events can help Latvia with the pension problem and move the country toward economic recovery. Latvia needs to re-negotiate with the IMF and the EU the terms of the loan agreement to allow for softer conditions. Then with more budgetary latitude, the government should revitalize the economy through a more robust public sector.

First, the IMF and EU need to relax their loan conditions before they handicap Latvia economically any more. Latvia does need to reduce the deficit and control spending, but too much too fast can stunt growth, lose jobs, and decrease investment in the short-, medium-, and long-term. Steep spending cuts and higher taxes over the next few years will prolong the effects of the financial crisis and not leave Latvia in a position of strength or growth when the worst is over.

Instead of the up-front deficit reduction conditions of the loan now, Latvia should request a graduated deficit reduction plan that is related inversely to rises in gross domestic product. Thus, as GDP rebounds, the government will take up more measures to lower its deficit. Economic growth will be faster and steadier this way. The Latvian budget, too, will be more flexible to deal with unforeseen conditions (like pension payments). Other harsh reforms demanded by the IMF, such as cuts to public sector wages and wage ceilings, should be allowed to be implemented over time as well.

For good reason, the IMF/EU loan should have some conditions — loans should not be a reward for bad behavior; however, the Latvian government still deserves deference in deciding what is best for the country. The IMF has said it is willing to discuss the consequences of the Constitutional Court ruling with Latvian leaders and is willing to reduce the loan conditions. The EU should also be pushed to show more leniency to Latvia as many member states, including France and Germany, have exceeded the rule on not exceeding 3 percent deficits at various times. Under new circumstances, Latvia should ask for a new deal.

Second, the Latvian government should develop a package of programs aimed at providing relief from the crisis and to help the economy recover. The IMF/EU loan brought some relief to the country’s financial problems, but mostly just staved off complete collapse. After negotiating looser loan terms, Latvia should seek to use the remainder of its loan to bring stability to the private sector and spur responsible growth through an active public sector.

Americans have learned probably better than anyone that sometimes a government needs to spend its way out of tough times. Ironically, deficit spending can grow an economy so much that a country can climb out of deficit. It is counterintuitive, for sure. Yet, the government can be an engine to the economy. This Keynesian economic model underpinned America’s response to the current financial crisis: a gigantic financial rescue package laced with new spending. But that is just the most recent example.

Franklin D. Roosevelt’s New Deal of the 1930s, the archetype of Keynesian economics, set the precedent for government intervention in correcting downward trends in the private sector. The New Deal consisted of various government programs and projects that set Americans to work and stabilized the economy. America clawed its way out of the Great Depression largely through New Deal spending.

Latvia needs its own New Deal, admittedly a scaled-down one. Instead of creating the acronym soup that characterized the US New Deal, Latvia can forgo creating new agencies and bureaucracies by working within existing structures. Yet many of the same strategies could work here.

Latvians could be put to work on restarting stalled construction projects, repairing roads, or even producing art. Locals could rebuild or repair schools, courthouses, parks, or other public facilities throughout the country. Still more could help in distributing food and clothing to poor areas, opening soup kitchens or homeless shelters, and retraining the unemployed for new jobs. The government could invest in transportation systems, renewable energies, construction, schools, and small- and medium-sized businesses. It could also provide housing assistance and alleviate some of the strains on the real estate market.

The IMF and EU should allow the Latvian government some deficit spending to launch its own New Deal instead of crippling it with tough deficit reduction measures. The American New Deal worked because it provided relief, reform, and recovery—three things sorely needed in Latvia. Some relief measures could be taken up immediately by creating new jobs and providing direct assistance. With reform already underway, recovery could be right around the corner.

The Constitutional Court’s ruling may not have made Latvia’s budget woes any better, but it could be the impetus for some drastic changes. To deal with the unexpected pension expenses, Latvia has grounds to negotiate a new deal with the IMF and EU for softening strings attached to the financial rescue loan. That could open the way for a New Deal in Latvia, which can give the country some relief and begin some recovery. Latvia needs a new deal and New Deal.

First and foremost, Latvia should reduce its post-Soviet style corruption which is actually the base cause of the current crisis. The total leniency to corruption, whis was symbolically reflected in the hilareous election of a bribe-taking doctor to the position of state president in 2007 should be reversed. Directly related to corruption is protection of oligarchs and their minions and circles, e.g. in all kinds of tax loops, total deafness of government and law makers on issues of progressive income tax, etc. And, last but no least, devaluation of lat or not, the absurdity of drastically raising all taxes and duties in the time of recession must be dealt with and reversed. With the current budged and tax policies, a recovery is simply unimaginble.

Re. Olgerts comments– My company has been trying to develop a pharmaceutical project in Latvia for a couple of years. We obviously misjudged the post-Soviet style corruption level that seems to pervade the business and government culture. Our initial assessment was that Latvia was a great place to do business— educated workforce, safe, etc. As we started down the path of developing the project we started picking up the clues— minor graft at the local level for zoning approvals, requests of kickbacks for financing, etc. At this point I doubt we will build the facility— crap economy and corrupt infrastructure.

Re: “this author knows nothing of economics. keynsian economics was abandoned in th 70’s because it leads to more unemployment and inflation”

The reasons for it being abandoned were as much political and interest based as anything.

Re: “and the new deal failed to produce any real economic recovery for almost a decade. it was only after ww ii that the US finally pulled out of the depression.”

The New Deal halted the economic bleeding. Put millions back to work. Put in place regulations permitting the greatest economic boom capitalism every experienced following WWII, only dismantled by Reagan, Bush, Clinton, & Bush. The New Deal itself failed to solve the Great Depression fully because it failed to spend enough. WW II increased spending by multiples of the New Deal and the economy recovered. Following WW II spending was greatly reduced, the economy fell in 1946/47, the spending was resumed, and with it the post-WW II boom…

it halted the economic bleeding? what would you call a doctor who halted your bleeding after an accident but was so inept that with his fumblings you had to stay in the hospital for 10 years?

and trying to say that government regulation “permitted” the greatest economic boom in history makes no sense. if government regulation were the main driver behind economic prosperity then countries like India and China would be the richest in the world. instead, they wallow in poverty. the only reason those countries have shown imporvement is because they have somewhat relaxed their governmental control of the economy.

I agree with the fact that if the government spends a lot of money, the economy will grow in the short run. just like if you get a new credit card your lifestyle will improve in the short run. however, there are consequences to making irresponsible decisions, like spending more than you make. in the 1970’s many world economies paid the price with very high unemployment and inflation. they tried to solve the problem with government regulation in the form of price and wage controls. things got even worse. the keynsian scam of spending your way out of problems was exposed.

there is a reason that the imf doesn’t allow countries to run new deal programs when it gives out loans. the economists there have read history books and know that the new deal didn’t work. the only people who are ever for this new deal hogwash are political academics who are often quite ignorant in economics.

Just because you do not subscribe to it, does not mean Keynesian economics has been disproven, abandoned, or is hogwash or a scam. As Jeff said, the stagflation of the 1970s was caused equally by political events (such as the oil crisis) as economic policy. And to say that the Keynesian economic model is not present in the current response to the financial crisis in the USA, UK, France, and others is an exercise in delusion. In fact, the very idea of the IMF giving a bailout loan to a troubled country is an example of Keynesian economics. Seems like Keynesian economics is alive after all.

Regulation can provide the conditions for amazing economic prosperity. Too much can hurt it (in India and China for example–that’s why steps toward deregulation are paying off). Too little can make it vulnerable (as in pre-Depression USA). The reforms of the New Deal provided enough regulation for stable growth without stunting it.

No one said the New Deal would fix the economy overnight but it brought jobs and hope. Those are two things I think Latvia could use. Try telling the millions of Americans who survived because of the New Deal that it didn’t work (and try not to get a black eye). And as Jeff said, WWII only amplified the basic underpinnings of the New Deal–that some measure of government intervention and spending can improve the economy. It took a while to recover from the most severe economic depression in the modern world, how could it not? It will also take some time in Latvia.

A New Deal in Latvia won’t be a silver bullet, but it can stop the bleeding. After that, the country still has a long way to go–just as the US did. As Olgerts said, there is political corruption to address. But might it be better if some of that money fell into the Latvian economy rather than the pockets of corrupt politicians? I know some unemployed people who would think so.

i never said that keynsianism isn’t in existence today, just that it was discredited. politicians love keynsian stimulus packages because it is like a free ticket for them to waste money on what ever they want and it makes it appear that they are doing something about the problem. it is done for theatrics to keep uneducated people voting for them. During the arab oil crisis Tobin, one of the leading keynsians of the time offered the solution of wage and price controls. Nixon knew from his experience during wwii when he was incharge of implementing price controls that they did not work. yet in the 70’s he implemented them anyway. theatrics, even though they may be harmful, are what inspire hope and create a feeling of change. a boring painful solution to stagflation, like the one proposed by volcker that actually worked, cost jimmy carter his re-election.

if monetarist philosophy had been implemented at the start of the great depression it never would have happened. Bernanke himself admited this to congress.

Rather I agree on most of the comments than on the content of this article. Except from problems like corruption, there may be just another simple reason why Latvia cannot get out of the current situation on its own but has to hope others will drag it out of the pit with their own recoveries. The reason: the lack of leadership and vision in Latvia. No one knows how to (re)act on the current situation, especially economists. And no one even attempts to (re)act. They’re just waiting and hoping for better times…

Of course, that is a effect which Latvian politicians do not feel unhappy about, as corruption is daily business (e.g. for hidden party financing) for at least several of them. A new deal, like described by Michael, would do nothing but washing increased state expenses into the pockets of Oligarchs and party financing, how it has been done the years before. A general distribution of “wealth” to the public, e.g. local craftsmen or other small business people, would not happen (except you father is the driver of a minister).

“I agree with the fact that if the government spends a lot of money, the economy will grow in the short run.”

The “short run” proved to last 25 years after WW II and produced the greatest economic expansion in world history…

“there is a reason that the imf doesn’t allow countries to run new deal programs when it gives out loans.”

The IMF has been completely discredited. Their programs have produced no significant growth nor development the past 2 decades…

“if monetarist philosophy had been implemented at the start of the great depression it never would have happened. Bernanke himself admitted this to congress.”

This is a counterfactual with no basis in fact. How would monetarist policy have halted the Great Depression. The Great Depression was global. Indeed, what economic history reveals is that where state intervention was strongest, recovery was greater, not the reverse. Bernanke got both the Great Depression wrong, and his response to this crisis. Both were precipitated by the development of income gaps (high inequality) and the corresponding asset inflation they caused. Having done nothing to resolve this core issue, we will not see returns to high growth…

Source: balticreports.com

It’s Not About That!

At some point, broader questions are inescapable.  Sorting out wheels within the wheels can lead to more confusion not less.  Sun Tzu’s advice to deflect your enemy’s attention appears to be in play at every turn.  It can feel that the more you know, the more you must know and at the same time something is hidden from view.  Symptoms become the basis for analysis, yet there is always an inherent lack of confidence; judging from symptoms can be a difficult business. 

 Perhaps the only thing that makes some degree of convoluted sense is to simply assume that whatever it is, “it’s not about that”.   

 The stimulus package and the omnibus spending bill were about economic recovery.  Hair on fire, we have a crisis, we have to do it now! Jobs, jobs, jobs!  However, unemployment is 20% worse that predictions.  White House economists admit that we need to resign ourselves to 10% unemployment.  Outside of the stock market and massive gains in productivity based on the need for business to get lean in a hurry there is no significant recovery.  The consumer is the key and yet, we declare a start to the recovery in the absence of consumer spending.  Huh?  Analysis that contends the recovery is not really a recovery is supported by deducting temporary stimulus spending, temporary jobs and government jobs from the calculus.  Massive government job creation was, as you may recall, the very first section of the stimulus bill; permanent jobs to administer a temporary spending program, a symptom perhaps?  Massive amounts of stimulus spending went to bail out states guilty of profligate spending, what about next year?  Conclusion; the stimulus could not have been about recovery, if it was, it would have been structured differently, although that Turtle Tunnel project in Florida was a cute idea.

 Corporate bail outs were about saving jobs, the financial system and the manufacturing base.  However, bailed out auto manufactures continued to send jobs oversees and there was no caveat attached to the funding requiring that set the stage for bringing displaced jobs back to the U.S.  The traditional position of capital in the bankruptcy process was turned on its head in favor of union desires and yet unions still lost jobs under bail out funding.  The precedent applied to car companies puts all capital investment in question where the government stands to assume a role.  We’re we to give in to our lesser angels we might come to the conclusion that government control of the manufacturing base, the credit vehicles that go with that base, the insurance market, banks, investment houses, student loans, compensation and up to 70% of the home loan market was a quick and easy way to potentially exert a massive degree of vertical control the economy.  Just saying!  Whatever it was, it is not about what they said it was about or the results would be different.

 Compensation controls in the bailed out banks was about accountability and paying the taxpayers back.  It’s confusing, banks that did try to pay back TARP funding we’re met with resistance at every turn.  Of late, nothing about the management at Freddy and Fannie and their compensation guidelines; nothing about the Banking Committee’s role in setting policy and their points of accountability.  The argument is well made (Investors Business Daily, Thomas Sowell and others) that Freddy, Fannie and government mandates had more to do with the housing crisis than the banking industry, per se.  So is it really about compensation and accountability or is it about control and intimidation?  The inconsistencies loom large, a symptom perhaps?

 Health care simply cannot be about health care.  If health care was about health care Congress would be focused on making the deal that would deliver the most health care to the most people on the most immediate basis possible; a deal that would deal with issues of general agreement such as pre-existing conditions, availability, permanence and portability.  In the context of a threatened public option, at deal could be made within the regulated private insurance markets.  

 The obvious and ongoing complexity of the challenges inherent in legislating a health care solution is the best of all arguments for taking advantage of existing markets to address the problem.  If health care was about health care the public option would be the logical last resort not the first priority. 

 If the “crisis” in health care was actually about providing health care you would take the quickest road to solutions, not a public option that commences in five to six years when a nearly immediate fix is available in the markets that currently exist. 

 Is health care a slippery slope?  It could be!  As an operations executive I once worked with a Controller who defined his job as “anything that has to do with money and since everything has to do with money, my job is anything and everything I say it is”.  Could the same attitude prevail with a government option?  Food, weight, medication, environmental factors, exercise, stress, child care; these and more are all potentially health care issues.  Should we evolve to a single payer system can you be sure that “by definition”, the bureaucracy does not end up saying to you “since everything effects health our job is anything and everything we say it is?”  The EPA, “by administrative definition” declared CO2 a hazardous gas and now moves to apply their full weight to the control of a naturally occurring, necessary gas.  We do have the guiding light of actual examples to look to for guidance.            

 It is not about recovery, or jobs or health care.  It is about control and a Progressive ideology that glorifies the role of government in the pursuit of a yet undefined utopian ideal. 

 What this is about is who you trust.  Do you trust the individual or do you trust the collective wisdom of a massive bureaucracy?  Do you trust the dynamic of individual freedoms driving the process or must that process, and by extension the people, be controlled and guided at every turn?

 It’s not about what they say it’s about!   The good news is that this equation has two sides because  It’s also about standing against “it”, whatever form “it” may take.

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Democrat Controlled Congress lead by obama has empathy for the uninsured. He shows he cares by taxing to pay for health plan now, that will kick in 2013-2015. Showing his concern by breaking his promise and taxing even those making under $125,000 a year.

What greater love can a man show to his Country. A testimony to his fulfillment of his prophecy.

What ???

Yes, obama was elected in landslide, hero to the masses.Now with his agenda polls low and this article, he reminds of an American hero. Benedict Arnold:

“Yet Arnold has gone down in history not as a hero but as a villain, a military traitor who, as commander of the American fort at West Point, New York, in 1780, schemed to hand it over to the British. ”

http://www.earlyamerica.c.....rnold.html

Whose hands indeed, Landreaux , ‘’THAT IS THE QUESTION“.

William Shakespeare – To be, or not to be (from Hamlet 3/1)

http://www.artofeurope.co.....e/sha8.htm

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I do wonder about all you people who think they can live thier lives believing that unless it is “Perfect” then we shouldn’t do it.

Perfection is a process not a starting point.

This is true from healthcare to our National Deficit. We may not be able to start out with the best healthcare reform but we need to begin and work toward perfection.

Not starting is not an option, there is no question about that.

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No one is saying perfect, just be realistic. We know from working examples what happens. Is not what obama is saying. Government health plans worldwide are deep in debt, cutting care, long waits, etc.

To lower cost of health care, tort reform is easy, unless your soul is owned by lawyers. Your second biggest contributors.

Open State to State competition is obviously another answer. I won’t repeat all Republican quick helps. And said here many times. Changes presented by Republicans can lower cost now, not 2013-2015.

Obama said “Not starting is not an option,” or something to that affect. Nobody I know of is saying that.

Why hasn’t obama cut the prescription drugs already that he worked out with companies. Could help the needy now. No need to wait.

Yes begin and build, not take over 1200 pages bill. Do baby steps.

The polls are against obama plan.

Obama plan is more like a holocaust to Americas health care.

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“To lower cost of health care, tort reform is easy, unless your soul is owned by lawyers. Your second biggest contributors.

Open State to State competition is obviously another answer. I won’t repeat all Republican quick helps. And said here many times. Changes presented by Republicans can lower cost now, not 2013-2015.

Obama said “Not starting is not an option,” or something to that affect. Nobody I know of is saying that.

Why hasn’t obama cut the prescription drugs already that he worked out with companies. Could help the needy now. No need to wait.

Yes begin and build, not take over 1200 pages bill. Do baby steps. ” – Bill

Makes perfect sense there then again that was decided long ago.

Senator Douglas of Ill. back in the 1850’s 1860’s took a piece of legislation that kept being denied in congress and broke it into its individual pieces and made multiple pieces of legislation and passed them one by one until virtually the entire original piece of legislation was passed that was originally denied. So as Bill said, baby steps work. That legislation I believe was a negotiation of the Kansas/Missouri Territories. The argument was over whether to make the territories a slave states or a free states.

Chop that giant hunk of crap into individual parts, and see which parts both dems and reps can agree upon and get the ball rolling now.

What do you say Bill? Sound like a reasonable plan?

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I personally could agree with that.

Pass now the things both parties agree to. Have open discussion. Begin those fraud and waste investigations now. Do the things that lower cost of insurance now.

Then, when all is done, step back and evaluate.

I believe is better than destroying all we have.

Sen. Douglas that ran against Lincoln ? I understand he was a great orator. Obviously, he thought like me. Ha-ha.

I think Republican party would welcome it. I would suggest that you read their plan at official web site. Surely some cost saving measures could be signed quickly.

I recall Nate said some form of health care would pass. I doubt he was talking about this. What a surprise to both parties, President, and public if such a thing happened.

We agreed on something and the world is still spinning.

I have not watched the news. Have no idea how election is going. Guess I should check…. Looks like Republicans are ahead in all but one I think.

Republican in New Jersey expected to win. A big win for my party. Democrats spent 3 to one more. Plus Obama won the State and came 3 time I believe. Bill Clinton and Biden showed up ??? He is fat like me. Democrat runner called him fat.

If Republicans do well tonight, our plan could occur in Congress. Rest assured, Blue Dogs are watching. Can’t be helpful for present bill especially with polls showing people against.

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Yes Senator Douglas that beat lincoln in the Senate election in Ill. Not that it matters, but he was a racist, as most people were in the 1800’s, including abolisionists and good old Honest Abe Lincoln.

I suppose it is the republicans turn in congress as it appears to go back and forth like that all the time. Honestly I think it is good that it goes back and forth, if any one party has control for too long it’s a bad thing. Just like the early US government went back and forth with the south versus the north in number of slave versus free states and control over the other party in government. (I dont mean one controlled the other, I just mean one party had more votes than the other.)

I personally don’t vote republican versus democrat, I vote based on “Does this person at least ‘appear’ to share my ideals”

Anyhoo off to physics class

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In the 60’s my family had a black man horse ornament. Thing for tying horses in old days. I remember my Father painting man face white. My Dad was affected by that era’s happenings. There were no black people in my town, but Dad did it. I remember that well.

We moved to Florida. I recall our driving through deep hills of Arkansas and seeing bathrooms.. men, woman, and colored. In Georgia we saw packed streets with black people at night. First time I ever saw a black person in person.

I was raised to judge the person. To do for myself. My families came over from Britain and Germany. Leaving because of German oppression, I will say slavery. Slavery is lack of freedom. Discrimination. Working for government.

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