Tuesday, April 9, 2019

France’s Fiscal Dilemma Solved

I was struck by this morning’s headline in the New York Times:

No doubt this was intended as irony, but that itself is ironic, since the “unrealistic” attitude it sums up is actually a good starting point for policy.  France has one of the world’s better welfare states, and it should be preserved and enhanced.  French taxes are very high—almost half of national income—and should be cut.  Carbon needs to be priced far more comprehensively and aggressively than Macron’s idiotic gas surcharge, but that can be done with little or no additional net taxes.  (Hint: rebate.)

So what squares this circle?  France’s budget deficit is way too small, about 2.6% of GDP the past two years.  Given the slack in its economy (over 9% headline unemployment) and rock bottom real interest rates, France would be wise to cut taxes and preserve spending even if the gilets jaunes had never existed.  Of course, it is prohibited from doing this by the eurozone’s Stability and Growth Pact, but that’s an argument against the Pact, not the policy.

Nothing I’ve said goes against standard macroeconomic advice.  The reason for bringing it up is that headline, and the article that follows it, which recycles a facile putdown of populism that is both economically ignorant and disdainful of social needs.  Come to think of it, that could be a good way to describe Macron and the political circle he represents.


Unknown said...

Not to endorse any fiscal hysteria from CNBC, but was wondering what you thought about this parade of (mis)information:


Peter Dorman said...

Thanks, Unknown. Crazy stuff indeed. It's true that the French seem to be downplaying a modest fiscal expansion for 2019, at least according to the IMF's World Economic Outlook database. But "reform", of course, means "dismantling the post-WWII social accord" to Brussels, and the entire Stability and Growth Pact framework has been disastrous. The article repeats the party line without the slightest critical distancing. Unfortunately, this has been the norm in reporting about the eurozone.