Phantom French Austerity

Hollande and VallsThe New York Times is reporting a brewing political crisis in France. The Prime Minister is planning to dissolve the government in a battle over budgetary belt-tightening. Per the story:

“The political crisis reflected a widening backlash against austerity not only in France but in Europe more broadly, as well as deepening tensions between France and Germany, which continues to advocate budget cuts as necessary to restore confidence in the eurozone.”

The authors contrast France’s woeful recent record of poor growth (none in the first half of 2014) with that of Spain. After suffering a much sharper downturn, “Spain, whose government last year pledged to ease up on austerity, is only starting to see the return of some growth.”

The story presents a simple tale: governments that follow the misguided path of austerity (presumably cutting spending) suffer from weak growth, while those who spend more freely can turn the corner. This is a Keynesian line of thinking, but the authors present the causal links as received truth, rather than as contested theory.

Relatively few people like quibbling about macroeconomic theories, so let us delve further than the authors did and look at data. From the World Bank dataset, here are government final consumption expenditures as a percentage of GDP:
France_GraphThese numbers do not seem to support the Times story at all. The fiscal pain, it’s plain, has mainly been in Spain. Before jumping to that conclusion, though, a bit of caution is in order. The virtue of looking at spending as a percentage of GDP is that it lets us compare different-sized countries more easily (France’s economy is bigger than Spain’s). It can make comparisons across time tricky, though, when GDP is fluctuating. This is not too much of a problem for France, where from 2008 to 2013 GDP grew by a total of 1.1 percent, with only modest swings. Spain, on the other hand, saw its GDP plunge 17 percent from a peak in 2009 to a trough in 2013, before experiencing a 2.7% rebound in 2014.

But these adjustments only sharpen the contrast between the Times tale and the data. Spain has cut expenditures to well below peak crisis levels – which were lower than French levels to begin with – and is now starting to see growth. French austerity is very difficult to discern – spending is above pre-crisis levels and staying relatively constant.

To be fair, in the case of both France and Spain, the story emphasizes pledges and plans, rather than the effects of past budget measures. Perhaps consumers and businesses in France and Spain are acting on the basis of their expectations about the future rather than responding to the immediate effects of current spending.

This is a possibility that received a lot of attention in macroeconomics (the so-called “rational expectations revolution”), but the upshot was that a great deal of Keynesian thinking got tossed out the window. As a small taste of why, consider what the average Parisian should make of the French government’s austerity talk. Should that person believe that budgets will be trimmed, just because President Hollande says so? Or should that person look at the country’s recent track record? Or should that person undertake a more sophisticated calculation of how France will need to respond to political and economic pressures in the years to come? One could make a case for each of these approaches, though the gullibility approach of accepting public pronouncements seems the least supportable. More sophisticated approaches may lead our Parisian to ask whether he will ultimately have to pay back a trumpeted fiscal stimulus, thereby undercutting the enthusiasm the stimulus was supposed to inspire.

Even though the a Keynesian approach may be called into question by recent experience, the episode still provides evidence of John Maynard Keynes’ acuity. After all, it was he who warned us: “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

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One thought on “Phantom French Austerity

  1. Pingback: New Deficit Numbers in Perspective | World of Cents

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