Why Iceland Is a Success Story

I was recently alerted to a remarkably stupid attack (and I use that term advisedly) directed at me from the Council on Foreign Relations on the subject of Iceland.

The C.F.R. people take me to task in a blog post titled " 'Iceland's Post-Crisis Miracle' Revisited" for measuring economic performance in Iceland and the Baltics relative to the pre-crisis peak, which they suggest is some kind of scam. Why not measure relative to the post-crisis trough, under which the Baltics look better?

Oh, boy. Economists have been studying business cycles for something like 90 years, and done comparisons to previous peaks all that time; apparently these guys don't know about any of that. So let's try this slowly.

First of all, we think of a recession as a period in which the economy falls below its potential; the natural way to gauge a recovery is to see how much of the lost ground has been regained.

Better yet, compare two hypothetical countries -- call them country I and country L. Both suffer from a severe economic setback, but country I does a better job of responding to the shock, so that output falls only 10 percent in I but 20 percent in L. Then both economies recover. In that recovery, output in L grows more from the trough than output in I -- but only because the country did so badly in the first place. Yet the C.F.R. people would have us believe that L, not I, is the success story.

Or do a bit of history. The economy in the United States grew 10.9 percent -- yes, 10.9 percent -- in 1934. The New Deal triumphant! Or maybe not. Real gross domestic product was still about 20 percent below its 1929 level.

So by comparing output to the previous peak I'm doing the obvious, natural thing; the C.F.R. alternative makes no sense.

Oh, and Ryan Avent, the economics correspondent at The Economist, took on in his own blog post another, earlier C.F.R. argument that the Baltics have grown more since 2000. This is a different kind of confusion: mixing up long-run growth in potential with shortfalls below potential. Iceland was and is a rich country; the Baltics were poor countries playing catch-up, which isn't relevant either way to the crisis story.

One place where I do disagree with Mr. Avent is in his desire to stop talking about Iceland. Yes, it's a small island exporting mainly fish and aluminum. But you take your natural experiments where you find them. (The economist Milton Friedman made his original case for floating exchange rates in part by invoking the example of, believe it or not, Tangier). Iceland was the only European-periphery country that received huge capital inflows, then responded to the crisis not with a grim determination to stay on or pegged to the euro, but by devaluing. In the process it demonstrated that devaluation is a lot easier than "internal devaluation," the attempt to regain competitiveness with a fixed exchange rate, which is actually the main point.

Defining Success Down in the Baltics

I still get comments and mail from people claiming that the experience of Latvia and/or Estonia proves that I'm all wrong, or something. Most of the people saying this don't know anything beyond one or two good numbers they've heard. So, here's what you need to know. Look at the charts on this page on gross domestic product and unemployment.

We're talking about two economies that suffered severe, Depression-level slumps, and have since made up some but not all of the lost ground. You could, by the way, have said exactly the same thing about the United States in 1935.

I mean, obviously it's good that some ground has been regained. But this is the best people can do to demonstrate the wonders of austerity?

Mitt Romney: Not Exactly a Captain of Industry

It appears that the Obama campaign has decided to ignore the queasiness of Democrats who have Wall Street ties and go after Mitt Romney's record at Bain Capital. And rightly so!

After all, what is Mr. Romney's case -- that is, why does he want us to think he should be president? It's not about ideology: Mr. Romney offers nothing but warmed-over right-wing platitudes with an extra helping of fraudulent arithmetic and it's fairly obvious that even he himself doesn't believe anything he's saying.

Instead, his thing is competence: Supposedly, his record as a successful businessman should tell us that he knows how to create jobs. And this in turn means that we have every right to ask exactly what kind of businessman he was.

Now, the truth is that even under the best of circumstances, the case for electing a businessman as president would be very weak. A country is not a company -- does any company sell more than 80 percent of what it makes to its own workers, the way the United States does? -- and competitive success in business bears no particular relationship to the principles of macroeconomic policy. So even if Mr. Romney were a true captain of industry, a latter-day Andrew Carnegie, this wouldn't be a strong qualification.

In any case, however, Mr. Romney wasn't that kind of businessman. He didn't build businesses, he bought and sold them -- sometimes restructuring them in ways that added jobs, often in ways that preserved profits but destroyed jobs, and fairly often in ways that extracted money for Bain but killed the business in the process.

And in a front-page article in June, The Washington Post added a further piece of information: Bain invested in companies that specialized in helping other companies get rid of employees, either in the United States or overall, by outsourcing work to outside suppliers and offshoring work to other countries.

The Romney camp went ballistic, accusing the Post of confusing outsourcing and offshoring, but this is a pretty pathetic defense. For one thing, there weren't any actual errors in the article. For another, it's simply not true, as the Romney people would have you believe, that domestic outsourcing is entirely innocuous. On the contrary, it's often a way to replace well-paid employees who receive decent health and retirement benefits with low-wage, low-benefit employees at subcontracting firms. That is, it's still about redistribution from middle-class Americans to a small minority at the top.

Arguably, that's just business -- but it's not the kind of business that makes you especially want to see Mr. Romney as president.

Or put it a different way: Mr. Romney wasn't so much a captain of industry as a captain of deindustrialization, making big profits for his firm (and himself) by helping to dismantle the implicit social contract that used to make the United States a middle-class society.

So now he proposes bringing the skills and techniques he used in business to the White House.

Somehow, I'm not enthusiastic about the prospect.

ARTICLE ON BAIN SPARKS CONTROVERSY

According to a Washington Post report published last month, Bain Capital controlled companies that specialized in moving American jobs to countries with lower wages when Mitt Romney, the presumptive Republican presidential nominee, was managing the private equity firm.

"While Bain was not the largest player in the outsourcing field," wrote the reporter Tom Hamburger, "the private equity firm was involved early on, at a time when the departure of jobs from the United States was beginning to accelerate and new companies were emerging as handmaidens to this outflow of employment."

He continued: "Bain played several roles in helping these outsourcing companies, such as investing venture capital so they could grow and providing management and strategic business advice."

The report has proven problematic for Mr. Romney because on the campaign trail he has repeatedly spoken out against outsourcing. Additionally, he has pledged that, if elected, he would stem the flow of American jobs to lower-wage nations like China.

Officials from President Barack Obama's re-election campaign have cited the Post article in their attacks on Mr. Romney's record as a businessman and have released television ads that suggest that Mr. Romney would be an "outsourcer-in-chief" were he to be elected.

Mr. Romney's campaign has forcefully denied that Bain shipped jobs overseas and in a statement, called the article a "fundamentally flawed story."

In addition to demanding that The Washington Post publish a retraction of the article (the editors declined and stand by the report), the Romney campaign accused Mr. Obama of misleading voters through ads.

Some commentators have suggested that the offensive Mr. Obama launched is working. "The intensity of Mr. Romney's reaction to the Post article suggests that the campaign believes the attacks could be effective in portraying him as a business executive who allowed American jobs to be lost to other nations," wrote Michael Shear in an online analysis for The New York Times.