Iceland recovered quickly despite higher taxes after letting its banks fail

Evidence

In terms of growth Iceland has fared better than anyone would have dared hope. The IMF projected a contraction of 10 percent in 2009 that turned out to be 6.5 percent. Apparently—note to John Cochrane—fiscal multipliers do exist after all. In 2010, the economy contracted by 3.5 percent, and in 2011 growth returned at 3 percent, based in part upon real exports of goods and services. Growth at a similar rate has continued into 2012, placing Iceland near the top of OECD growth performance. With higher marginal rates of taxation, returning growth, capital control, and equal fiscal tightening, Iceland is on target to eliminate its budget deficit in 2014 and have a budget surplus of 5 percent in 2016. — Mark Blyth, Austerity, 645

Categorization

• XREF: Directly contradicts John Cochrane’s and the austerity playbook’s claims about fiscal multipliers — connects to the broader critique of expansionary austerity in this book and the Mattei austerity literature. — connects to: Iceland let its banks fail rather than socializing their debts onto taxpayers — Mark Blyth, Austerity: The History of a Dangerous…, 642; Letting banks fail kept Iceland’s 2012 debt-to-GDP ratio at 99 percent — Mark Blyth, Austerity: The History of a Dangerous…, 644; Letting banks fail reversed Iceland’s two-decade inequality surge — Mark Blyth, Austerity: The History of a Dangerous…, 647 (+1 more)
• SEED: The ‘note to John Cochrane’ aside is a nice model of engaging a named economic adversary in prose.

Broader Connections

• Iceland and Ireland offer a natural experiment comparing austerity with bank default #expands (0.78) — Mark Blyth, Austerity, 638