Benjamin Studebaker

We are the Borg. Your biological and technological distinctiveness will be added to our own. Resistance is futile.

If the French thought their 2012 election of socialist François Hollande over former president Nicolas Sarkozy meant that they would have their Keynes and avoid austerity, they have been proven fatally wrong. Hollande has just announced plans for a €50 billion austerity package, a cut of 4% of France’s GDP. He has promised to cut taxes on businesses by €30 billion, but this will come in the form of the elimination of a requirement that French businesses fund a family welfare program. Based on the IMF’s multiplier estimate for depressed economies (1.5), France will lose 6% in potential GDP growth over the next 3 years under this plan, potentially resulting in a new French recession. Hollande’s argument for this plan betrays a stunning incompetence on economic matters and illustrates that French voters have been played–there was no democratic alternative to Sarkozy in 2012.

What is Sarkozy Hollande’s argument? He makes appeal to Say’s Law:

The time has come to solve the main problem of France: production. Yes, I said production. We have to produce more. We have to produce better. So it is on supply that we must act. On supply! It is not contradictory with demand. Supply creates demand.

Emphasis Added.

Jean-Baptiste Say’s claim was that “the supply creates its own demand”, or, as he argued:

a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products.

Say’s Law does not hold in what Keynesians call the “liquidity trap”, in which the economy contracts or becomes depressed as a result of too many people attempting to save money simultaneously. Consumers are not making purchases with their money–they are using it to pay down debts, or keeping it out for fear of economic instability, and as a result they are not increasing purchasing. Businessmen, who are nothing if not prudent, observe this, and avoid using their profits to expand supply, knowing that even if they were to manufacture additional units, those units would go unsold or the price of all the units being sold would fall. Across an entire economy, this falling of prices is called “deflation”. Hollande’s plan will take more money out of the pockets of French consumers, who will receive reduced benefits and/or public sector jobs, reducing consumer spending. The wise businessmen who will receive the tax cut will not throw that money away building additional capacity, as doing so would only cause the price of their products to fall. Nor will they invest this money in the wider French economy, as collectively all French businesses will be in this same situation of not experiencing sufficient demand to encourage them to increase supply. Instead, they will either dump the money in government bonds, invest it abroad, or simply sit on it. In any case, the French economy will not be the beneficiary.

We see much evidence for this in the data–French inflation is now well below target:

And France remains far from full employment:

The solution to these problems is monetary and/or fiscal stimulus, increasing the amount of money in consumers’ pockets allowing them to pay down their debts and increase purchasing and enabling suppliers to sell more goods and services, but Germany forbids the European Central Bank from engaging in the former and Hollande now appears intent on denying the French economy the latter.

It is sometimes argued that while the French socialists are aware that they are engaging in economically destructive policy, they feel they have no choice due to concerns about French government debt, but these concerns are misplaced.

It is admittedly the case that France’s debt to GDP ratio has increased quite a bit since the onset of the economic crisis:

French borrowing costs are currently very close to the record low:

This indicates that the market is reading and willing to finance increased state spending by France. The market understands that rising French debt is so not so much because French government spending is out of hand, but because French tax revenues are depressed due to poor economic performance. Indeed, austerity will only worsen the government’s financial picture by depressing the economy further and depriving the state of tax revenues, as I discussed last March.

Hollande’s proposed austerity is economically indefensible. It rolls back a century’s worth of new economic research on the business cycle, it will damage French growth prospects over the next three years, and there is no case that it is necessary to prevent a fiscal crisis in France.

What’s worse, it illustrates that these days, parties of the left come in three feckless varieties:

1. Rhetorical Leftist Parties–parties that use center-left rhetoric to win elections but, while in power, enact the same kinds of economic policy as right-wing parties, albeit perhaps slightly less severe or extreme (e.g. the French socialists).
2. Status Quo Parties–parties that use center-left rhetoric to win elections, but, while in power, act as a conservative force to maintain the status quo. They do not enact policies that worsen the situation, making them marginally better than their right-wing alternatives, but since right-wing parties tend to win at least half the time, this still results in more bad policy than good for the nation as a whole over time (e.g. the American democrats).
3. Unelectable Pseudo-Communist Parties–parties that are not even committed to Keynesianism, that instead have a radical left Marxist agenda and are politically impotent (e.g. the Socialist Workers Party).

The upshot is that in most rich countries, there is no longer any political party committed to enacting sound economic policies that has the power to do so. This will weaken the democratic commitment in most rich countries over time, and unless the parties climb out of their self-imposed economic dark age or newer, better alternative governmental systems are developed (sophiarchism?), we are headed for a scenario the Greeks and Hungarians are already well-acquainted with–more and more people drawn once again to fascism and communism.