Proof of the Pudding
Krugman’s description of the Icelandic ‘miracle’ has been challenged by the Council of Foreign Relations (CFR). Presumably after reading the CFR piece, Greg Mankiw has, in his familiar uncommitted fashion, suggested that Krugman’s analysis lacks ‘let’s say, robustness’. The CFR challenged Krugman’s use of a standard approach in business cycle analysis: comparing real GDP to its previous peak. In his rebuttal, Krugman argues that he is ‘doing the obvious, natural thing; the CFR alternative makes no sense’.
A more direct comparison of economic performance since the crisis is available without the need to disentangle GDP’s trend and cycle – just compare unemployment rates in Iceland with those of the Baltic states and Ireland. The graph on the right does just that. Data are from Eurostat for the Euro countries and from Statistics Iceland. The proof of the pudding is in the eating. Perhaps ‘miracle’ exaggerates a little, but Iceland’s post-crisis record on unemployment clearly outperforms the others.