Scott Sumner  

Paul Krugman on French economic policies

An Educational Challenge... Ancestry and Long-Run Growth R...

A finance student from Coventry sent me Paul Krugman post from 1997, which has some interesting things to say about today.

Fifteen years ago, just after Fran├žois Mitterrand became president of France, I attended my first conference in Paris. . . . The only thing I do remember is a conversation over dinner (canard aux olives) with an adviser to the new government, who explained its plan to stimulate the economy with public spending while raising wages and maintaining a strong franc.

To the Americans present this program sounded a bit, well, inconsistent. Wouldn't it, we asked him, be a recipe for a balance of payments crisis (which duly materialized a few months later)? "That's the trouble with you Anglo-Saxon economists--you're too wrapped up in your theories. You need to adopt a historical point of view." Some of us did, in fact, know a little history. Wasn't the plan eerily reminiscent of the failed program of Leon Blum's 1936 government? "Oh no, what we are doing is completely unprecedented."

Something similar happened to the Hollande government, which is not that unlike the earlier governments headed by Blum and Mitterrand. All three governments were led by the Socialist party.

Krugman then discusses France's supply-side problems:

To an Anglo-Saxon economist, France's current problems do not seem particularly mysterious. Jobs in France are like apartments in New York City: Those who provide them are subject to detailed regulation by a government that is very solicitous of their occupants. A French employer must pay his workers well and provide generous benefits, and it is almost as hard to fire those workers as it is to evict a New York tenant. New York's pro-tenant policies have produced very good deals for some people, but they have also made it very hard for newcomers to find a place to live. France's policies have produced nice work if you can get it. But many people, especially the young, can't get it. And, given the generosity of unemployment benefits, many don't even try.
These supply-side problems largely explain why France's unemployment rate is roughly twice as high as in Germany. (Germany reports 2 rates, for reasons I'll never understand.)

Here's the conclusion, written a few years before the euro was created:

But let us not blame French politicians. Their inanities only reflect the broader tone of economic debate in a nation prepared to blame its problems on everything but the obvious causes. France, say its best-selling authors and most popular talking heads, is the victim of globalization--although adroit use of red tape has held imports from low-wage countries to a level far below that in the United States (or Britain, where the unemployment rate is now only half that of France). France, they say, is the victim of savage, unrestrained capitalism--although it has the largest government and the smallest private sector of any large advanced country. France, they say, is the victim of currency speculators, whose ravages President Chirac once likened to those of AIDS.

The refusal of the French elite to face up to what looks like reality to the rest of us may doom the very European dreams that have sustained the nation's illusions. After this last election it is clear that the French will not be willing to submit to serious fiscal discipline. Will the Germans still be willing to give up their beloved deutsche mark in favor of a currency partly managed by France? It is equally clear that France will not give up its taste for regulation--indeed, it will surely try to impose that taste on its more market-oriented neighbors, especially Britain. That will give those neighbors--yes, even Tony Blair--plenty of reason to hesitate before forming a closer European Union.

But if it turns out that Chirac's political debacle is the beginning of a much larger disaster--the collapse of the whole vision of European glory that has obsessed France for so long--we can be sure of one thing: The French will blame it all on someone else.

The eurozone had two problems, a severe mismatch in the supply-side of the various eurozone economies, and a shortfall in total aggregate spending. The combination was disastrous, both a deep recession and an uneven recession---creating internal conflict. Interestingly, Krugman doesn't anticipate the overall shortfall in AD (nor did I), but rather the one-size-fits-all problem.

Krugman was skeptical about the euro project, but didn't anticipate disaster:

Now a unified European market is a pretty good idea. There is even a reasonable case for unifying Europe's currencies--although there is also a good case for doing no such thing.
That was also my view. We both saw the one-size-fits-all problem, due to bad supply-side policies in the more socialist parts of Europe, but neither of us anticipated that the ECB would be so contractionary.

It's too bad that Krugman no longer does this sort of blogging. It's kind of fun to go back and read posts from a time when "socialism" was still a dirty word in America, not a policy that most Democrats have a favorable view of.

Comments and Sharing

CATEGORIES: Macroeconomics

COMMENTS (12 to date)
Daniel Klein writes:

Great post, thanks.

I wonder: What do you think the landscape of ideological character types among American economists, or American intellectual life more generally, will be in 2030?

Where are things going?

Is true liberalism just in long-term retreat among intellectuals for the indefinite future?

Brian Donohue writes:

Fascinating. At some point, Krugman decided that political advocacy was more important than clear-headed economics. Too bad- he was very good.

bill writes:

I agree with Brian.
I was thinking that today while reading PK's post on Fed Fumble. PK knows that 50bps is higher than 0-25, so it's not the ZLB and says so. Yet in 2011-2012, PK kept talking about austerity because the ECB's 1.5% rate was the ZLB, in PK's estimation. And PK will then fight that 0-25 is the ZLB when we now see that some central banks are at negative 75bps. Our Fed has been, at a minimum, 100bps higher than it could have been for 7 years (assuming that 75bps is an absolute minimum and we can't go to negative 76 or 86 or something).

Matt Moore writes:

'New York's pro-tenant policies have produced very good deals for some people, but they have also made it very hard for newcomers to find a place to live.'

Slightly off topic, but this reminded me strongly of when I first arrived in New York, with no US credit history. A lettings agent told me, without any sense of irony, 'because New York has such good pro-tenant laws, you probably won't find anywhere good to rent'.

Scott Sumner writes:

Daniel, Good question. In my view all through the history of economics it's been generally true that:

1. Inadequate AD makes economists dumber
2. Greater inequality makes economists dumber

I think the first one is the greater problem.

If we can solve the problem of inadequate demand (and I think there are easy technical fixes, the markets already know how to solve the problem) then I think liberalism will improve. Ditto for inequality, but that's a far harder problem to solve.

Thanks Brian.

Bill, Good point.

Scott Sumner writes:

Matt, Great story.

Jose Romeu Robazzi writes:

Totally agree. PK is a brilliant economist. It used to be fun and informative to read him.

@Prof. Sumner
It is incredible how uncertain times change people's beliefs. In Brazil, a lot of people are convinced that inflation here has some "structural" origin, meaning it is not a nominal, monetary phonomenon. In the US, it seems the same, a lot of people doubt the monetary authority power to produce inflation. It seems monetarists will continue to have a hard time convincing people otherwise ...

curious finance student writes:

I really don't have anything useful to add.
But I am beyond happy my favorite econ blogger took interest in something I sent(made my day)

Cyril Morong writes:

From an August 2014 NY Times article

"the French are probably paying 20 percent more than they should for the services they get from regulated professions,"

ThaomasH writes:

There you go again Scott with your funny definition of "Socialism."

Perhaps you are nostalgic, as I am, for a time when the best use of Krugman's time was trying to explain comparative advantage instead of the costs of inadequate AD and shooting down lowering marginal tax rates as a growth panacea.

Jeff writes:

Scott is partly right. The lack of aggregate demand leads to widespread calls to "do something" and that something usually involves growing the government. But it's worse than usual this time because the bailouts have shown people that many of the advocates of smaller government were hypocrites of the first order when big donors were in trouble.

I think the political damage done to the conservative cause by the bailouts was immense. It's part of why we have Trump. Ironically, last night when Bret Baier asked Trump to name one thing the government was doing that he thought it should not be doing, Trump replied that banks were over-regulated. He didn't complain at all about the bailouts.

curious finance student writes:

French employer must pay his workers well and provide generous benefits, and it is almost as hard to fire those workers as it is to evict a New York tenant.

indeed in 2016 that is still a major issue in france.As a matter of fact this week they are discussing a major simplification of their 3000 pages labour code.

needless to say the socialist party in power is so opposed to it that they describe it as a capitalist conspiracy against workers.

I am also extremely happy my favorite econ blogger took interest in something I sent(made my day).
thanks Scott

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