ARTICLE ECONOMIC
France's Hollande is
completely out of touch with modern economics
There's no economic reason for France to cut social spending at a point when its economy has enormous excess capacity
There's no economic reason for France to cut social spending at a point when its economy has enormous excess capacity
1) French President François Hollande startled many of his
supporters last week, along with fans of evidence-based economics everywhere, when
he rejected modern economics in favor of the sayings of an early
19th-century French economist. After winning the election on a platform that the government
needed to fill the gap in demand created by the collapse of asset bubbles, 2) Hollande repeated the old line from Jean-Baptiste Say that "supply
creates its own demand."
While the appeal to French national pride may be touching, it is
completely out of touch with modern economics. His plan to cut
spending will have serious consequences. We should have known at least
since Keynes that economies can be subject to
prolonged periods of high unemployment due to inadequate demand. The
problem is that the private sector does not necessarily generate enough demand to
buy back everything it produces, leaving large numbers of workers unemployed and vast amounts of
productive capacity sitting idle.
3) From an economic standpoint this is an
incredible waste of resources. Economists often concern themselves with distortions created by
quirks in the tax code or barriers to trade, but the losses from having an
economy operate below full employment dwarf these inefficiencies. 4) In the United States alone we are looking at more than $5tn in lost output to date, as a result of the downturn. The losses would be even larger in Europe. 5) where economies are operating much further below their
levels of potential output.
From
a social standpoint,6) the costs are even greater as millions of people are needlessly denied the
opportunity to work. This
often has devastating outcomes for unemployed workers and their families. 7) There is considerable evidence linking unemployment with
alcoholism and suicides. 8) There is also a growing body of
evidence that there are serious life
consequences for the children of unemployed workers.
Additionally, a prolonged period of high
unemployment has a lasting impact on the economy's productive capacity. A recent study by the Federal Reserve Board
estimated that potential GDP has fallen by
more than 7% ($1.2tn a year) due to the economic downturn. If this study is correct, 9)we will be throwing an amount equal to the entire discretionary
portion of the budget (both military and domestic) into the garbage every year
long into the future , because 10) we failed to adequately
stimulate the economy following the collapse of the
housing bubble.
The problem is that we do not know
how to boost private sector demand. The basic Keynesian story of spending money sounds simple, but
it also happens to be right. In an economy that is constrained by
inadequate demand, 11) the need is for more spending. That may not typically be the case – the
economy may typically be supply constrained – but 12) it is demand constrained right
now. This
means that if 15)the government spends more money on education, healthcare, research or infrastructure, 13)it will boost the economy and put people to work.
If there was any doubt on this point, 14)there is much new research to
back it up. A meta-analysis of recent research on the topic by Sebastian Gechert showed that
the overwhelming majority of studies found that 15) government stimulus was effective in
boosting the economy in a downturn. The International Monetary Fund, which is hardly known as a
hotbed of anti-capitalist thought, has produced several
compellingstudies showing that countries that stimulated their
economies more in this downturn have achieved
stronger growth.
16) There is no longer a serious debate that stimulus will lead to more
growth contrary to Mr Hollande's 19th-century platitude. 17) Nor is there reason to fear that France and other countries might fall off
a debt cliff. The warnings about the dangers of going above
a 90% debt-to-GDP ratio proved to be the result of an Excel spreadsheet error and some over enthusiastic proponents of austerity. In short, 18) there is no economic reason
for France to be cutting back social spending at a point when its economy
has enormous excess capacity.
Unfortunately, economics apparently plays little in role in
determiningeconomic
policy in France and most
other countries these days. 19)For this reason, it is likely that Hollande will get most of his
proposed cuts put into law. These cuts will directly hurt people, slow growth and cost jobs.
Remarkably, the cuts will likely be viewed as a success by the business press and much of
the public. The
reason is simple: 20)France is likely to show decent growth in 2014,
in spite of the cuts.
Economies do not
shrink forever. After years of
cutting back, governments across Europe are
relaxing austerity, at least modestly. The same is true in the United States. This will be a net positive for growth
everywhere, including France. As a result, even if Hollande's cuts may lower
growth below what it otherwise would have been, he will still have some positive growth and job
creation for which he can take credit.
In this sense, Hollande
can be seen as similar to the pagan priest making sacrifices
to the sun god at the winter solstice. When the days start getting longer again, the priest can boast about the
success of the sacrifice to the sun god. The big difference is that, unlike Hollande, the priest's sacrifice didn't make things
worse.
Rumus :
PRESENT TENSE
Simple Present Tense
S+v1+O
Presen Continuous
Tense
S+ tobe ( is,am,are ) + ving +
O
Presen Perfect Tense
S+ has/have+v3+O
Present Perfect
Countinuous
S+
has/have+ been+ v3+ O
PAST TENSE
Simple Past Tense
S+ v2+ O
Past Countinuous Tense
S+ tobe ( was, were )+ ving+ O
Past Perfect Tense
S+ had+ v3+ O
Past Perfect
Countinuous Tense
S+ had+ bee+ ving+ O
FUTURE TENSE
Simple Future Tense
S+ Will+ v1+ O
Future Countinuous
Tense
S+ Will+ be+ ving+ O
Future Perfect Tense
S+ Will+ have + v3+ O
Future Perfect
Countinuous Tense
S+ Will+ have+ bee+ v3+ O
PAST FUTURE TENSE
Past Future Tense
S+ would+ v1+ O
Past Countinuous Tense
S+
Would+ be+ ving+ O
Past Perfect Tense
S+ Would+ have+ v3+ O
Past Future
Countinuous Tense
S+ would+ have+ been+ v3
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