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)