Macronomics will not save France

Anatole Kaletsky wrote in “A ‘Macroneconomic’ Revolution?” that the new French President has figured out the golden mean of economic policy that will lead France out of the swamp of despair into which its economy has sunk for a decade.

Typical of socialists, Kaletsky blames Europe’s lost decade on too much capitalism, or as he says, market fundamentalism. In the great film Casablanca, the Police Chief tells his deputy to “round up the usual suspects” after a crime has been committed. There was no effort to investigate or search for evidence. He had a standard set of criminal types that he harassed on a regular basis in order to appear to be doing something. Socialists respond to every economic crisis by rounding up one usual suspect – capitalism.

The US had become increasingly socialist since the election of Wilson. A nation that takes 45% of GDP for all levels of government, has over three million pages of business regulations that grow at the rate of 100,000 pages per year, and most of its citizens get their income from the government cannot be considered a capitalist or market fundamentalist nation. Europe has been socialist much longer. See Hayek’s Counter-Revolution in Science and Bastiat’s essays for evidence from the 19th century France. Germany was completely socialist by 1918 and still indicted capitalism for its problems.

Kaletsky credits market fundamentalism for a 25 year boom from the 1980s until the latest recession, but then it blew up the world:

But market fundamentalism also inspired dangerous intellectual fallacies: that financial markets are always rational and efficient; that central banks must simply target inflation and not concern themselves with financial stability and unemployment; that the only legitimate role of fiscal policy is to balance budgets, not stabilize economic growth. Even as these fallacies blew up market-fundamentalist economics after 2007, market-fundamentalist politics survived, preventing an adequate policy response to the crisis.

There was no market fundamentalism from 1980 onward. That is an example of socialists re-writing history to fit their ideology. The US became much more socialist after 1980. Yes, Carter and Reagan got rid of price controls on energy, transportation and banking, but there was no deregulation, as the increase in the Federal Register proves. And Reagan, Carter and Bush I implemented historically record setting tax increases. Tiny steps had been made toward greater international trade through the World Trade Organization, but each agreement limited trade as much as it opened it. Yes, mainstream economists went a little crazy over the Efficient Market Hypothesis, but that had no impact on policy.

So what is Kaletsky’s solution to the current economic swamp in Europe? He wrote:

France’s new president, Emmanuel Macron, based his election campaign on a synthesis of “right-wing” labor reforms and a “left-wing” easing of fiscal and monetary conditions – and his ideas are gaining support in Germany and among European Union policymakers. If “Macroneconomics” – the attempt to combine conservative structural policies with progressive macroeconomics – succeeds in replacing the market fundamentalism that failed in 2007, the lost decade of economic stagnation could soon be over – at least for Europe.

That’s all there is – greater spending by bankrupt governments on socialist programs and loser monetary policies coupled with freer trade and labor markets – the standard socialist policies for the past century. Kaletsky imagines that market fundamentalism prevented an adequate response to the 2007 crises. But he has nothing to say about the US, EU, and Japan flooding the world with newly minted money or the massive spending by all governments during that time.

Of course, in the eyes Kaletsky that clearly wasn’t enough because it didn’t work. He joins of market monetarists in assuming that those policies will work completely if implemented. The remote possibility that such policies haven’t worked in the past because they can’t work never occurs to socialists like Kaletsky. He has the key: “To succeed, monetary, fiscal, and structural policies must be implemented together, in a logical and mutually reinforcing order.”

Wow, how did economists miss those caveats for 30 years? Such a statement advertises a disastrous ignorance of economic history. Does Kaletsky really believe that no economist in the past tried to coordinate fiscal and monetary policies or time them to reinforce each other? Does he think Bernanke and Congress were tossing trillions of dollars at the problem hoping some of it would stick?

If Kaletsky had any sense of economic history he would know that mainstream economists gave up on fiscal policy after the disaster it caused in the 1970s because of long and variable lags: 1) it takes governments a while to recognize a problem exists; 2) it takes a few months to come up with a plan; and 3) it takes months longer to implement the plans. Because of the lags, fiscal policies tended to amplify instead of dampen cycles.

Since the latest recession, mainstream economists are facing up to the obvious: monetary policies face the same long and variable lags. It takes a quarter or two of data to realize there is a problem and another to determine policy. Sure, the stock and bond markets react immediately to policy changes and that fools market monetarists into believing no lags exist. But the changes in employment and inflation that are supposed to come from the policies often take three to five years. So the employment and inflation data the Fed reacts to today is actually the consequence of policies devised three to five years ago.

Here is what is most likely to happen in France under Macronomics: The French government will borrow and spend more because everyone likes that. It will happen first. The ECB will probably keep printing new money, or at least not tighten. But without an increase in supply through greater production, nothing will happen but higher inflation.

Relaxing the labor laws and protection of French firms from foreign competition will take much longer and require a bigger fight. Macron will be forced to compromise with labor unions and other socialists as well as corporations and the “freer” market side of the policy will be forgotten and severely restricted. In other words, not much will happen. That’s politics. Another recession will happen and socialists like Kaletsky will again blame the usual suspect.