When Francois Hollande won the French election back in May 2012, Paul Krugman mocked the media \u201chysteria\u201d about the victory of a left-wing politician who promised to revive the French economy by raising taxes even higher on wealthy Frenchmen.\u00a0 I, as usual, took a more moderate, nuanced and balanced view, writing a squib titled \u201cSeven New Reasons Not to Create Jobs in France.\u201d\u00a0 They were: a new wealth tax, a 75% top marginal income tax rate, a hike in the estate tax, a hike in business taxes, a \u201cdividend tax\u201d on companies (to encourage reinvestment), higher taxes on bonuses and stock options, and a rise in the tax on equity trades.<\/p>\n
In addition to chasing Gerard Depardieu to Russia, these tax hikes killed lots of jobs. In May 2012 the unemployment rate was 10%; now it is 10.8% and headed higher in a moribund, uncompetitive economy with a rising trade deficit despite weak domestic demand. \u00a0It turns out that, contra Dr. Krugman, job growth is not all about aggregate demand.\u00a0 The supply side matters too.\u00a0 If you attack employers with a raft of taxes you get less employment, less economic growth, and weak tax revenue.\u00a0 Hollande almost sounded like Larry Kudlow when he exclaimed at his press conference, \u201cHow can we run a country if entrepreneurs don\u2019t hire?\u201d\u00a0 (But then he returned to form, asking \u201cAnd how can we redistribute if there\u2019s no wealth?\u201d\u00a0 Please take note, Mayor DeBlasio.)<\/p>\n
How do you say U-turn in French<\/b>?<\/p>\n
To save his presidency, Hollande has reversed some of his anti-business policies. Only a few. It will be a long time before he is as popular in the corporate boardroom as he is in the Parisian boudoir.\u00a0 Hollande\u2019s U-turn exemplifies a trend toward healthy international competition within Europe.\u00a0 While Hollande was busy proving Dr. Krugman wrong, so were British Prime Minister David Cameron and Chancellor of the Exchequer George Osborne.\u00a0 These benighted conservatives adopted a dreaded \u201causterity\u201d program of cutting spending in order to rein in budget deficits and shore up Britain\u2019s credit rating.\u00a0 After a slow start, this policy has worked, with economic growth picking up nicely and the unemployment rate declining from 8.2% in May 2012 to 7.4% recently. \u00a0Meanwhile, the German economy has been expanding and Spain, through a brutal process of \u201cinternal devaluation\u201d (slashing real wages because the country could not devalue its currency), has also become much more competitive.\u00a0 Will Italy follow?\u00a0 (Another positive sign: Europe is starting to notice that its renewables-first energy policy will be an economic disaster because it impoverishes consumers and makes heavy industry uncompetitive versus the all-fracked-up United States.\u00a0 Germany\u2019s giant chemical industry, for example, could relocate to Texas and Louisiana.)<\/p>\n
With France falling behind long-standing rivals Britain, Germany and Spain, Hollande decided he had to change course.\u00a0 It is far from clear his reforms are deep enough.\u00a0 In his press conference he was vague about how he would cut spending to pay for tax cuts, and many politicians in his coalition hate capitalism and capitalists.\u00a0 When the government spends 57% of GDP, you have a long long way to go before you have a vibrant capitalist economy.<\/p>\n
In truth, I have been somewhat too bearish on Europe.\u00a0 The Euro still seems to me to be fundamentally dysfunctional, and Germany\u2019s prescription that all nations in the EU should run trade surpluses is absurd.\u00a0 With banks still in deleveraging mode, lending may be too weak to fund healthy growth.\u00a0 Nevertheless a few years of pain and agony have indeed driven salutary reforms that are improving economic performance.\u00a0 Maybe even in France, eventually.\u00a0 This is positive for U.S. profits; something like 15% of S&P profits are in Europe, and while growth will not be strong it is far better for it to be\u00a0 growing than shrinking.<\/p>\n","protected":false},"excerpt":{"rendered":"
When Francois Hollande won the French election back in May 2012, Paul Krugman mocked the media \u201chysteria\u201d about the victory of a left-wing politician who promised to revive the French economy by raising taxes even higher on wealthy Frenchmen.\u00a0 I, … Continue reading