Monday, April 23, 2012

The French reject austerity.

Yesterday's presidential election results in France, particularly if the voters' initial rejection of Sarkozy holds up in the upcoming run-off, signal widespread public dissatisfaction with the prevailing policy of cutting budgets to deal with Europe's financial problems. Instead the voters seem to favor the left's approach of promoting growth and reducing inequality. Why is this possibly important to us? Because it signals that the U.S. has been on the right track in dealing with the recession, while Europe has been on the wrong track. The voters in France seem to be demanding a correction more in line with the approach the Obama administration has been taking.

I dealt with the economics of this choice in a post a couple of months ago, relying mainly on Paul Krugman's analysis of the mistakes the Europeans seem to be making. Let's review. When we encounter a recession, our natural reaction is to take the steps we would take as a household in dealing with a sudden drop in income. We have to cut expenses to get our budget in balance! The problem is that when we react that way as a nation, we only make the recession worse. If we reduce spending, demand for all kinds of goods and services goes down, production must drop, more workers must be laid off, demand then drops even further, and the whole vicious cycle continues until we hit some kind of bottom. If instead the government steps in to make up for the reduced demand, by increasing instead of decreasing spending--even if we have to increase the debt to do that--we can avoid some of those layoffs, cushion the fall, and hopefully get the economy moving again. That was what we did here in the United States, although many would argue we did not even do enough stimulus spending, particularly at the state level, where layoffs continue. And it seems to be working, while leaving us with a bigger deficit, which we will have to deal with as the economy improves.

In Europe, the wealthier nations have forced the countries in the most financial trouble to make serious cutbacks in government spending, and have instituted austerity measures in their own countries. So far, that has had the predictable effect of slowing economic growth, which may make it more difficult for these countries to emerge from the recession. And the voters are not exactly thrilled with the resulting cutbacks in benefits and higher prices. If these policies are causing lots of pain in the short term, and don't seem to be helping in the long term, it is hardly surprising to see such a strong voter reaction against the conservative Sarkozy government.

Wait a minute, conservatives might respond. Aren't you forgetting the strong showing by the right wing candidate, Le Pen? Sarkozy could end up with most of her votes in the run-off, making the end result a conservative triumph. Those voters occupy a similar position to those in the United States who blame immigrants for most of our problems, and most of them probably will lean toward Sarkozy in the run-off. But not all of them. And they are balanced by voters who chose Melenchon, the candidate to the left of the Socialist winner, Hollande. Most observers seem to think Hollande is favored to win the run-off. But I'm not making any predictions, only commenting on the strength of the backlash against Sarkozy's and Angela Merkel's austerity policies.

And what about the deficit, conservatives might also point out. If Europe doesn't get its supposedly out-of-control social spending under control, aren't they headed for fiscal disaster anyway? Perhaps they are, and perhaps some reforms are needed to rein in spiraling pension costs and other unsustainable expenses, just as reforms may be needed in this country. But growth must come first. And the left has another answer to controlling the deficit, and that is to tax the rich. Hollande is proposing a 75% tax rate on the wealthiest earners, and a cap on the ratio between CEO pay and worker pay at publicly-owned companies. That makes President Obama's plan to institute the Buffett rule and return to a 39% top income tax rate look positively timid. If conservative voters in the US would pay some attention to France, they might stop calling Obama a socialist. In France, they have candidates who actually call themselves socialists and can still win elections. On the other hand, even Hollande's income tax plan does not reach the heights of socialism we experienced in the United States, back when our top marginal tax rate was 90%. That was when we were led by the socialist administration of Dwight Eisenhower.


(Christophe Ena/AP photo)

14 comments:

  1. Angela Merkel is next, or at least her current coalition is. IF she is re-elected as chancellor, it will be with a different coalition partner (most likely the grand coalition of her more successful first term). The FDP (a.k.a. the party of the rich) is toast.

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  2. Misleading, Joe.

    First, Sarkozy was in a dead heat with scialist Hollande (28% to 27.5%) and the another 18% of French voted for Marine Le Pen, of the far-right Front. A full 11% voted for independants.

    As far as the French elections being a signal of what is working here at home, misleading.

    From San Diego to New York we are moving away from opulant public employee guaranteed pensions plans to 401k type systems. It is clear to all but a few who refuse to consider or report the truth.

    From New York:

    "Thousands of public employees across New York State rushed to sign up for pensions over the last several weeks, seeking to lock in generous retirement benefits before cuts approved by the State Legislature took effect on Sunday."

    "At the New York City Employees’ Retirement System, for example, more than 12,000 workers applied last week to enroll in the pension system — more than 40 times the typical weekly number of applicants. And the New York City Board of Education Retirement System received nearly 9,000 applications over the last two weeks, after enrolling only 122 new members in all of February."

    In San Diego and the rest of California you will see similar even stronger legislation the is year. Ther French may be following our political wave of change but it is not what you suggest.

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  3. Like I said, I make no predictions about the ultimate outcome of the French elections, but the experts say that if the incumbent can't win the first round, he is in trouble.

    And I have no way of knowing what is on French voters' minds, but the results are being interpreted as a rejection of the Merkel-Sarkozy austerity plan they are imposing on all of Europe. My point doesn't have much to do with pension reform. That is probably a medium to long range problem, and I acknowledge that reforms may be necessary to make these programs sustainable. But I have no wish to discuss pension reform, and no special expertise on the subject. And pension reform has very little to do with the point of my post. My point has more to do with current levels of deficit spending, and demands for cutbacks of government spending in general. And how we have approached this problem differently in the US compared to Europe.

    In Europe, they have instituted more drastic cuts than we have. This is true for a lot of reasons. Our political system makes it possible to cut taxes, without demanding that we seriously address deficit reduction (even though we make a lot of noise about deficit reduction). Also both parties are willing to protect military spending, which is huge compared to other countries. And the US has much greater capacity to borrow at very cheap rates, compared to almost any other country. For these reasons, we are able to run and have been running some pretty big deficits. My argument is that this is helping us out of recession, while we are seeing Europe heading for a double dip.

    In Europe we are also starting to see a reaction against austerity, because people can actual feel these austerity measures cause negative economic growth, with increasing levels of unemployment, higher prices, etc. And people also feel the effects of government spending cutbacks.

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  4. There is overwhelming evidence that Europeans are unhappy with austerity. In most countries unemployment is already much higher than in the US, and austerity is making things worse. Also, in most countries (though not France) austerity has been imposed at the behest of the EU, regardless of what elected national governments and their voters want.

    Be cautious about the knee-jerk media designation of Le Pen's FN as "far right". In the days of her father, that was a fair description. Now, though, the party has ditched much of its radical platform and in fact sounds quite leftist in most ways -- its economic position is paternalist and protectionist to a degree US Democrats would never dare, for example. It's true that it is highly nationalist and anti-immigration, but in Europe immigration mostly means Muslims, the less-assimilated among whom are Europe's equivalent of our Christian Right (in Europe's secular societies, Islamists are the chief proponents of creationism in the schools, anti-gay discrimination, anti-Semitism, etc.). It's not really comparable to the way the immigration issue works in the US.

    Sarkozy is the odd one out among the four candidates, with his support of failed free-market economic dogmas which have never been popular in France. My guess is, many of Le Pen's voters will easily go for Hollande in the second round.

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  5. I don't know much about pensions in Europe, but in the USA it's been a well known fact that public employees, such as teachers, police, ect, make a smaller then private sector paycheck, their rewards come in the form of a liveable pension and health benefits after 20-40 years of work. It was the financial industry that caused the collapse of the global economy, starting right here on wall street. The amazing thing is how the GOP was able to turn the blame and place it on the public workers pensions and the ignorant ate it up. Just like how everyone forgot how bush received info about 9/11 before it happened, did nothing, then lied us into a war in Iraq.

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  6. Both the U.S. and the EU are on the wrong track in dealing with the global economic crisis. The key difference is that in the U.S. the Federal Reserve Bank has fired up the printing presses and used all the new liquidity to purchase the toxic "assets" weighing down bank balance sheets and to purchase U.S. Treasury bonds, ensuring that bond yields remain low and funnelling low-interest cash into the stock market. All of this has been a boon to the 1% but done next to nothing for the 99%.

    Meanwhile, Germany and France have been reluctant to allow the European Central Bank (ECB) to do the same thing, particularly with respect to purchasing sovereign debt from countries like Spain, Italy, Greece, and Portugal, where unemployment is more than double what it is in the U.S. Since all of those countries are part of the Euro Zone, they cannot print their own currency and inject fiscal stimulus into their economies. Thus, the ECB has them by the throat and is extracting harsh, deflationary austerity concessions in exchange for bond purchases.

    Both strategies are ultimately punitive to regular people and will do nothing to resolve the current economic crises. It looks to me like voters in France are not inclined to see their standard of living go the way of Greece or Spain, while billions of euros flow to banks and the ultra rich who are Sarkozy's real constituents. Unfortunately, in the United States, we do not have that option, as both parties and their leaders feed at the same Wall Street trough. Americans are well and truly screwed.

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  7. Thanks for the thoughtful comments on a number of fronts.

    << There is overwhelming evidence that Europeans are unhappy with austerity. >>

    I agree. As well, there is overwhelming evidence that well over half of Americans are unhappy with the way our economy is running and Congress is working (not working). I am one of them. My family income has decreased by 30% in the last two years and at my home we are looking at further slashing. I pay more for food, more for gas, more for health insurance and small savings are worth less. There is plenty of unhappiness on both sides of the pond with our politicians and Wall Street gamers.

    "In the United Statest ... both parties and their leaders feed at the same Wall Street trough."

    Here, here!

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  8. I don't like being grouped ideologically so I won't do it to anyone here. I consider myself in the center. To be clear, I am no apologist for the GOP. I am pissed off and living on the edge financially. To my wife and myself, the fringe right looks as politically f*#ked up as the progressive left. The far left and right should understand how unpopular and out of touch they are in this country.

    "in the USA it's been a well known fact that public employees, such as teachers, police, ect, make a smaller then private sector paycheck, their rewards come in the form of a liveable pension and health benefits after 20-40 years of work."

    I am 56. That is not my experience. It was true at one time; but no more.

    "It was the financial industry that caused the collapse of the global economy, starting right here on wall street."

    I completely agree. I have chided some for years hoping they would speak to greater issues. having said that, Cali has an unsustainable public employee system. That was one example, of many, that will change because they have to.

    "The amazing thing is how the GOP was able to turn the blame and place it on the public workers pensions and the ignorant ate it up."

    I am not here to prop up the GOP or throw my soul to the Progressive arm of the Dems. The point has already accurately been made that both the GOP and Dems feed at the same trough.

    Here is the litmus test: ask people like my wife and I with university degrees whether they want their current income or those of state or federal employees with comparable job placement. I haven't even considered benefits.

    As for social programs in France or America that support workers until they expire after 20-40 years of work?! Stop working at 45 years old?! Who are these people? We are born into this world as children and it is usually tough. Hopefully, we experience the luxury of a lifelong love with a mate; maybe even the ultimate luxury of having children of our own and teaching them what we have learned.

    Work 20 or even 40 years and then be entitled to our children’s future?My view, our job on earth is to love and work. After that, you die and it is noble. Sure it is daunting. Work 20 years and sit back? Dang!

    Recommended: "The Chimpanzee"

    I have had at least one daughter in university for the last seven years. Each year tuition went up 6%. Over the last three years college tuition on average went up 25%. Last year alone, in California, our loan cost went up $10,000 for my daughter’s fourth and final year. Governor Brown signed the California legislation to make that possible. Congress has bent over backward for a decade or longer to empower an inept system that has allowed universities to rape the country's Pell Grant system, driving up tuition costs.

    Today, Obama pandered to NC Chapel Hill and tonight at UC Boulder Colorado students over costs of interest on loans; the audacity. The Presidents at these two schools have a higher income than Obama’s $400,000 a year. Our country’s problems are not a GOP vs Dem issue. They are systemic.

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  9. One thing about the right and left, Kevin, is that at least they are ideologically coherent. As for the middle, the rest of us have a hard time understanding where you're coming from. You're unhappy that private sector wages and benefits have fallen, but you think that public sector wages and benefits should fall also. You're unhappy that California has been raising tuition at public universities, but you are also unhappy that the president is trying to ease the burden by freezing rates on student loans. You have put politicians in such a box that no matter what they do, it is the wrong thing.

    And as to your question about who are the people in this country who are allowed to retire after 20 years of service, we call them the military.

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  10. << As for the middle, the rest of us have a hard time understanding where you're coming from. You're unhappy that private sector wages and benefits have fallen, but you think that public sector wages and benefits should fall also. >>

    At very least you could be truthful. I am unhappy that all wages and job opportunities have fallen or are falling. Don’t put words in my mouth. Your assumptions about me are mean spirited.

    << You're unhappy that California has been raising tuition at public universities, but you are also unhappy that the president is trying to ease the burden by freezing rates on student loans. >>

    You either don’t have children who attend university or are fortunate enough to be able to afford the massive expenses no matter what the cost. I will assume the first. Either way, as usual, you are missing my point.

    I will be brief about the Stafford loan system. The government sets the interest rate. It was 6.8 percent until September 2007 when President Bush signed the College Cost Reduction and Access Act. That made interest payments 3.4%. The government continued to guarantee 95% of all loans made to students.

    The student lending industry expansion coincided with the subprimemortgage business meltdown. There are strong similarities. In both, government policy was responsible for the overexpansion of an industry that became dependent on cheap credit. We have a trillion dollars in student loan debt.

    My main point was that we have allowed public and private universities to gouge the government with incredible tuition hikes; similar to the housing industry and Fannie and Freddie. How can this be lost on you? Where has Obama been on this issue the last three years? Answer: not present until now. Time to round up some more votes of that segment of the population who is most pissed off at him. Namely, college grads who are in debt $25,000; and almost 1 in 2 is out of work. He and Romney agree on this issue but, as usual, our politicians are late to the game unless it is to the benefit of big money.

    << You have put politicians in such a box that no matter what they do, it is the wrong thing.>>

    I didn’t put them there. They put themselves there.

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  11. Sorry if I sound mean-spirited. All I was trying to convey was that I have a hard time understanding the critique you are making, and at times it sounds self-contradictory and incoherent.

    You are angry, and so you are lashing out, and some of what you are saying does not make sense to me.

    And as far as your main point being that universities are gouging the government with tuition hikes (we have moved pretty far afield from talking about the French election, haven't we), that might be true in some cases, particularly with for-profit universities. For the most part, however, I don't see universities being particularly eager to raise tuition. They lose good students when they do that, and they have to make up a lot of the difference with financial aid anyway.

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  12. << For the most part, however, I don't see universities being particularly eager to raise tuition. They lose good students when they do that, and they have to make up a lot of the difference with financial aid anyway. >>

    I can't believe you wrote that :-)

    I am starting to understand why I sound incoherent to you.

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  13. To the guy that wrote this article: thanks for letting me know that a left-wing Glenn Beck does exist in yourself! Also, your article represents the first instance of anyone transcribing a fart into words, that I have personally encountered. Hugs!

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