The nature of French austerity

by on April 3, 2013 at 2:13 pm in Current Affairs, Economics, Uncategorized | Permalink

From today’s FT:

Mr Hollande himself has acknowledged that the state has got too big. “Public spending has reached 57 per cent of national wealth. It was 52 per cent five years ago. Do we live better for it? No,” he said late last year.

Agnès Verdier-Molinié put it differently:

“The reason spending has exploded is the multitude of different benefits and all the layers of administration,” she says.

Of course the French economy is already a mess.  Spending cuts may well be coming:

The government admits that it has run out of room to increase taxes, with the tax burden now equal to more than 46 per cent of GDP – one of the highest in the EU. This leaves Mr Hollande, who campaigned against austerity, having to persuade the country to accept a programme of public spending curbs of at least €60bn through 2017 from a total currently running at about €1.2tn a year.

I suppose you could argue that the current French slowdown is due to the expectation of future spending cuts, but most of us would find this difficult to swallow.  I will also predict that — if and when the spending cuts come — they will be accompanied by a worsening of output and employment, if only because French labor markets are not very flexible.  Still, it would be odd to suggest that “austerity” is the root cause of the French economic problems rather than a symptom of other, deeper issues.

Very Serious Sam April 3, 2013 at 2:33 pm

“it would be odd to suggest that “austerity” is the root cause of the French economic problems”

Yes, nevertheless the usual suspects, led by Paul Krugman, will claim it.

Michael April 3, 2013 at 2:56 pm

I think that sword cuts both ways. Concluding that austerity isn’t the problem in France doesn’t mean it’s not a problem elsewhere, or that if the public sector and tax rates are way too high in France that this implies they’re also way too high in other places as well.

That is to say, depending on the country in question, everyone should be careful when arguing for any policy implications for other countries based on what is happening in France.

Ray Lopez April 3, 2013 at 11:51 pm

By now we should all know the Keynesian script (which I disagree with, as do most of us MR fans): austerity is indeed the root cause of French economic problems since we need to increase spending now, even though in the long term 58% state spending of GDP is unsustainable arguably (though the Krugmanites will point to Sweden’s all-time high of 60%) since Keynesian spending is supposed to be temporary, until such time AD returns.

That will be Krugman’s argument: spend more now, and when prosperity returns we can make cuts later.

Nick April 4, 2013 at 3:20 am

I think you are being disingenuous. Krugman may be quite partisan but he is clear that, in his opinion, the EU’s problems are twofold with the Euro (yet no fiscal union) being the primary cause.

Jon Rodney April 4, 2013 at 8:37 am

I’m not sure why people read Krugman (or anyone else with a fairly nuanced Keynesian outlook) as saying that austerity is the cause of French economic problems. He definitely believes that austerity is making those problems worse, and that spending cuts/tax hikes should be delayed (or even replaced with additional spending in the short term), but that isn’t the same thing as saying austerity is causing them. This is just a reading comprehension fail.

Urso April 3, 2013 at 2:36 pm

liberté, austeritié, fraternité.

paddy April 3, 2013 at 2:42 pm

I see what you did there.

Steven Kopits April 3, 2013 at 3:22 pm

Yes, except it should be egalité, austeritié, fraternité. No liberté there.

dead serious April 3, 2013 at 3:40 pm

Yeah, absolutely none. Communist Russia (or Hungary), part two.

Affe April 3, 2013 at 7:23 pm

Lighten up, Ferenc.

Cicero April 3, 2013 at 8:27 pm

As yes – because a liberal social democracy is exactly the same as a totalitarian state – Road to Serfdom argument and all that. Please remind me again how millions of French are clamoring to get into the U.S. due to their lack of freedom.

somethingblue April 4, 2013 at 1:03 am

More specifically, clamoring to get into North Dakota. Only there can one be truly free.

Emil April 4, 2013 at 3:47 am

Well, it’s not really news that there is a large outflow of productive and highly educated french to London, New York, Dubai, Singapore, Hong Kong, Brussels etc.

revver April 4, 2013 at 5:01 pm

Clamoring to the U.S., Britain, Germany… The French youth have the same rallying cry: anywhere but here.

http://www.telegraph.co.uk/news/worldnews/europe/france/9565888/Get-out-of-decaying-France-while-you-can-campaign-warns.html

Execuse-moi: anyone with a degree want to pay into a socialiste Gerontocracy?…anyone…anyone

Cicero April 4, 2013 at 9:29 pm

“Execuse-moi: anyone with a degree want to pay into a socialiste Gerontocracy?…anyone…anyone”

YES! Can you arrange it for me? Much higher quality of life than the U.S (and longer-lived at that) – yeah must be awful…

Bryan Willman April 3, 2013 at 2:37 pm

There are many circumstances in life in which “too much of something” is not good, but when you try to reduce it, there is great pain (either temporary or not) to return the amount of that “something” to a good for the long term level.

Non-exercise, various drugs, various kinds of spending, various things that are fundamentally time wasting but essential to one’s employment or life in the immediate circumstance, and of course, “too much” government control of any economy.

In the French case there are surely collateral issues – labor markets with lots of issues, various cultural and regulatory issues that seem to affect land use and so forth – which are surely bound up in the same “stuck in a bad place” state as having gov spending such a large part of GDP.

Meegs April 3, 2013 at 2:49 pm

Mr. Hollande is just another Very Serious Austerian.

mpowell April 3, 2013 at 3:04 pm

The last paragraph of this post is very confusing to me. Are you actually implying that left-center economists in the US commonly argue that France only needs less austerity and that entitlement and labor market reforms are not needed? Or do you really believe that the worsening of their employment markets over the past 5 years are primarily being caused by the outsized French state? Because I quite commonly hear the view that labor market reforms are great but that the Euro needs monetary easing right now. And it is also easy to imagine an anti-austerity policy proposal of spending cuts and even larger tax cuts coming from the US based center left as a recipe for France. Fiscal stimulus has much more to do with the size of the budget deficit than the overall spending level. I thought this was well understood.

John Thacker April 3, 2013 at 3:31 pm

Fiscal stimulus has much more to do with the size of the budget deficit than the overall spending level. I thought this was well understood.

So did I, and then I saw people on the center-left decrying the United Kingdom (and Ireland, and the United States, and Japan) for “austerity.” Though I think it all rather demonstrates (as do quite a few EU countries) that fiscal stimulus is rather impotent in the face of the monetary authority. The ECB even raised rates in 2011, just as the BOJ did in the past two decades the moment it looked like deflation might end.

It’s all very well and good to say that fiscal stimulus might work if the central banks were to do nothing in response to increased inflation, but if you’re going to rely on convincing the central banks to change their position as a necessary step, you might as well concentrate on only that rather than both that and the political effort necessary to get fiscal stimulus. (Monetary stimulus is ineffective at the zero lower bound only when the central bank chooses to make it so, by viewing things only under that framing.)

mpowell April 3, 2013 at 5:41 pm

It’s true that not everyone gets it right, but there’s no need to confuse the issue further. And I’d also agree that if the monetary authority is not accomodating fiscal stimulus will definitely not help (besides which, euro countries have limitations in the degree to which they can run deficits that the US and Japan don’t face). But again, no need to confuse the debate here.

maguro April 3, 2013 at 3:04 pm

What a crazy wingnut. He must be getting his marching orders from the Koch brothers and/or the Mercatus Center.

dearieme April 3, 2013 at 3:20 pm

“French labor markets are not very flexible”: that’s the right tone, Mr Cowen, but the spelling is still American.

FXKLM April 3, 2013 at 3:56 pm

I don’t know why so many people have difficulty with the distinction between wealth and income. The French government is clearly not spending 57% of national wealth.

Brian M April 3, 2013 at 5:38 pm

Obviously, the root problem with France is a surplus of “zero marginal product” workers. They should try to raise the marginal revenue product of their labor to the market clearing wage through online universities.

Tom April 3, 2013 at 5:40 pm

TC: “Of course the French economy is already a mess.”

The particularities of French administration are interesting and worth reforming (with several reasonable positions to take mostly depending on different political values), but isn’t the French economy mainly a mess right now because of eurozone-level policy and misregulation of overleveraged and reckless French banks? The size and nature of the French state seem a separate matter, only indirectly related, since we’ve seen the French economy do well and not so well when it has been at approximately its current size.

Komori April 4, 2013 at 9:27 am

How much of that Eurozone-level policy has been driven by the French? They are one of the primary actors there.

jurisdebtor April 3, 2013 at 6:12 pm

Spending in France has “exploded”? From Eurostat:

French government spending as % of GDP:

2005-53.6

2006-53.0

2007-52.6

2008-53.3

2009-56.8

2010-56.6

2011-56.0

Total spending in 1999 Euros

2005-920,351.0

2006-952,566.0

2007-992,619.0

2008-1,030,025.0

2009-1,070,585.0

2010-1,095,602.0

2011-1,118,728.0

28 September 2012, France budget: Taxes favoured over spending cuts

http://www.bbc.co.uk/news/world-europe-19754016

“Measures in the [2013] budget include:
. . .

A freeze in government spending, excluding debt repayments and pensions.”

Derek April 3, 2013 at 6:22 pm

If we wonder why the euro authorities sold an optical backstop for 6 billion euros we are starting to see why.

Tom April 3, 2013 at 6:53 pm

An increase of 198 bil Euro from 920 to 1118 is a small explosion.

Here’s the problem, if one starts applying for many credit cards, in fact all credit cards possible, one can get many. While using them, and building up debt, it’s a lot of fun. To stop the increase in debt is a reduction in the fun.

But the debt increase will stop. Either by one’s own self control, or by going bankrupt so nobody lends anymore to you. It will stop.

Benny Lava April 3, 2013 at 6:55 pm

So when austerity in France causes a big contraction and banks start to panic, at what point do we say that the Euro has failed?

X April 3, 2013 at 9:13 pm

I don’t understand how someone could spend 50% on a state which provides FAR LESS of 50% of services and goods consumed.

Public spending needs to be reduced to half or a third of current values in most countries, ASAP.

And I don’t see what it has to do with “austerity”, since it means taxes can get cut, and people will have 33-50% more money to spend, and can go on spending sprees and so on.

steve April 3, 2013 at 10:41 pm

French austerity? Don’t make me laugh. I used to live there. It would be a near war zone. There won’t be anything beyond token austerity until there is no choice left. Of course, that is coming. Then it will be a near war zone.

Igz April 4, 2013 at 4:03 am

Check your facts Tyler… You’re just being as partisan as Krugman. (see comment from juris_debtor). And the euro has nothing to do with the “french problem”, nothing at all? According to you is just “French labor markets are not very flexible”, in other words, we can not fire everyone whenever we want just yet.

Austerity is inevitable in France, simply because France is not Germany, thus being in the euro means that the currency is way overvalued for them. Thus, no economic growth, no tax revenue growth, add to that an ageing population and generous benefits and … kabooom.

Emil April 4, 2013 at 5:25 am

err. the comment from juris debtor showed a real term increase of 13% in spending between 2005 and 2011 which seems consistent with TC’s claim that spending has increased…

Furthermore, anyone claiming that the French labour market rules are just fine and dandy can’t be serious. Youth unemployment is at record levels and there are endless examples of foreign companies who avoid investing in the country or who have serious problems trying to restructure their activities because of these rules.

R Richard Schweitzer April 4, 2013 at 3:37 pm

Surprising that no one quoted Margaret Thatcher’s:

“. . . run out of other people’s money.”

To which the current French administration could add:

running out of “other people.”

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