Too Much Government? Not In Paul Krugman's World
From his perch at the NYT, Paul Krugman informs us that he has detected a 'Plot Against France', because credit rating agency S&P has dared to downgrade the government's debt to 'AA' from 'AA+'. Keep in mind here that in France, government has the largest share of spending in the economy of all industrialized nations: it amounts to 57% of GDP. One might well say that it is on the verge of becoming a full-scale command economy. Admittedly that would be a bit of an exaggeration, since GDP omits all spending on raw and intermediate capital goods, with the exception of 'durable' capital. It therefore ignores a huge chunk of economic activity.
However, it is not an exaggeration to state that under the Hollande government, France has begun to adopt features of a 'Zwangswirtschaft' (literally: a 'coerced economy'), in which the government decides who may produce what, when, how, in what amounts, and so forth. The most recent evidence in this regard is that the government is now forcing companies to operate at a loss rather than fire workers, thereby further tightening what is already the most sclerotic and repressive labor legislation in Europe. Regime uncertainty in France has never been higher, and it is therefore no surprise that the country is in a seemingly inexorable economic downward spiral.
Krugman's solution to this problem is apparently that the government should increase its size even more by adding to its already out-of-control spending. Anyone doubting the wisdom of such a course is held to be “using debt fears to advance an ideological agenda.” Krugman of course is a completely impartial observer, who has no ideological agenda at all. He writes:
“On Friday Standard & Poor’s, the bond-rating agency, downgraded France. The move made headlines, with many reports suggesting that France is in crisis. But markets yawned: French borrowing costs, which are near historic lows, barely budged.
So what’s going on here? The answer is that S.& P.’s action needs to be seen in the context of the broader politics of fiscal austerity. And I do mean politics, not economics. For the plot against France — I’m being a bit tongue in cheek here, but there really are a lot of people trying to bad-mouth the place — is one clear demonstration that in Europe, as in America, fiscal scolds don’t really care about deficits. Instead, they’re using debt fears to advance an ideological agenda. And France, which refuses to play along, has become the target of incessant negative propaganda.
Let me give you an idea of what we’re talking about. A year ago the magazine The Economist declared France “the time bomb at the heart of Europe,” with problems that could dwarf those of Greece, Spain, Portugal and Italy. In January 2013, CNN Money’s senior editor-at-large declared France in “free fall,” a nation “heading toward an economic Bastille.” Similar sentiments can be found all over economic newsletters.”
Well, France definitely is a 'time bomb at the heart of Europe'. Its economy is performing very badly - unemployment is hitting record highs and industrial production is continually coming in below forecasts, in spite of the widely reported 'recovery' in euro-land (which in turn is a lagged effect of monetary pumping having increased true money supply growth in the euro area to 8.8% year-on-year between early 2012 and early 2013).
Although we doubt that France's debt problems will 'dwarf those of Greece and Spain', the country's well-being is more important for the euro area, given that it is the second-largest economy in continental Europe and considered an important part of the euro zone's 'core'. In fact, Krugman is deliberately misquoting what the Economist article actually states: it is not saying that France's economic problems could dwarf those of Greece, it is saying that the problems France could cause for the euro may dwarf those Greece has caused. Meanwhile, government spending in France has risen to new record highs. Frances's total debt-to-GDP ratio is by now a full 50% above the Maastricht treaty limit. Could it be that S&P was getting worried about this?