I think you missed the point of that whole exercise... Latvia and Estonia have tiny, almost insignificant economies, literally smaller than 49/50 US states. The lessons there are clearly not applicable to the US, or if you prefer, policies for the US shouldn't be applied to either of them.
Additionally, they aren't doing "pretty well" with austerity by any honest metric. Even four years after the GFC, their GDPs are still below where they were in 2007/2008, significantly in Latvia's case. Unemployment is extremely high (From 4%/6% in 2007 to 10%/14% today) and wages have fallen.
Note that the MR post is polite and humble, and gives fair consideration to both sides of the issue, unlike just about anything written by a certain ny times columnist.
Is it cherry-picking? I don't feel that it is. That GDP graph shows a normal moderate growth from 2000 right through to the crash. There was the slightest of upticks in the last year before the crash, but hardly enough to qualify as a boom. Which means that it is entirely fair to categorize Estonia's economic performance as normal just before the crash, and pretty lousy since.
At any rate, I was in Tallinn in June of this year, and the locals I talked to in bars and cafes were all very pessimistic about how the country was going. Maybe pessimism is just a cultural norm, but everyone that I asked felt that Estonia had gone backwards since the crash, and was still doing so...
If you look at the graph with the longer time horizon, you can see that Estonia, Lithuania and Latvia had stronger growth pre-crisis, a bigger bubble, a bigger collapse from the bubble, and a stronger recovery from the performance trough. Only by measuring by performance from their GDP peak do they look bad, and it's not obvious why this is the natural measure of recovery policies. You would think performance from the trough of the crisis or from some neutral pre-crisis point would be more relevant.
It's not even the real unemployment number, because that unemployment only counts the registed unemployed (who are registered at the Employment Office and receiving financial aid for job-seeking). The actual number of unemployed and people working without taxes is much higher (how much higher, nobody knows).
I'm glad you were the one to point out that Krugman has become so fixated with denying the obvious that it has become embarrassing. Continually pointing out that Japan hasn't get gone broke isn't much of a defense when their economy - once the envy of the world - has completed two decades of stagnation and shows no signs of recovery.
Had Japan done a Iceland-style cleanout, they would probably be still striking fear into the hearts of governments and corporates everywhere.
Except for one complication. Japan's public debt is largely owed to it's own citizens, such a large proportion being internal debt. Even if they defaulted on the external component, they'd still have a problem of the type Iceland could avoid. Iceland wrote off banking debt, which was something like 70% of their external debt.
You're right, my language was imprecise, and I'm conflating two events. The Icelandic government declined to recapitalize failing banks, even when under enormous pressure to do so by the UK government and others. The pressure you may know was partly due to various local government bodies and other institutions having deposits with Icelandic banks.
Because the Icelandic government declined to act as insurer for those deposits, the insolvency of them was seen as an effective write off of national indebtedness to other sovereigns.
No problem. I just get worried that people hear about corporations or nations "writing off" debt and wonder why the system is rigged so they can't "write off" their own debts. Of course you can, as long as those debts are owed to you and not by you.
OK, it's true that by some metrics (government debt for example), Estonia is doing pretty well. But Estonia's private sector debt (personal loans) is still over the top and is actually killing the workforce right now. Because of these loans, the wages aren't rising, even though the cost of living is thanks to joining the euro zone. http://statistikaamet.wordpress.com/2011/05/27/eestist-valja... (Estonia's department of statistics blog) has statistics about the year 2010, where the graph shows the most dominant age group of emigrants are men in the age of 25-29 and most people leave the country because of high unemployment. That's men and women leaving in their best working age, most of whom will never return.
So, yeah, Estonia might be doing fine by some short-term metrics, but in the long term austerity measures have done irreparable harm.
It's understandable that regular readers of Krugman may not know this since he goes to great pains to deny the obvious on this point.