(Above: French President Francois Hollande, member of France's Socialist Party. Courtesy of The Blaze.)
"Taxes on some wealthy French top 100 pct of income: paper
PARIS | Sat May 18, 2013 1:16pm EDT
(Reuters) - More than 8,000 French households' tax bills topped 100 percent of their income last year, the business newspaper Les Echos reported on Saturday, citing Finance Ministry data.The newspaper said that the exceptionally high level of taxation was due to a one-off levy last year on 2011 incomes for households with assets of more than 1.3 million euros ($1.67 million).President Francois Hollande's Socialist government imposed the tax surcharge last year, shortly after taking office, to offset the impact of a rebate scheme created by its conservative predecessor to cap an individual's overall taxation at 50 percent of income.The government has been forced to redraft a proposed bill to levy a temporary 75 percent tax on earnings over 1 million euros, which had been one of Hollande's campaign pledges.The Constitutional Council has judged such a high rate of taxation to be unfair, leaving the government to rehash it to hit companies rather than individuals.Since then, a top administrative court has determined that a marginal tax rate higher than 66.66 percent on a single household risked being considered as confiscatory by the council.Les Echos reported that nearly 12,000 households paid taxes last year worth more than 75 percent of their 2011 revenues due to the exceptional levy. ($1 = 0.7798 euros)(Reporting by Leigh Thomas, Editing by Mark Trevelyan)"
Amazingly, the highest levels of income in the United States have been taxed as much as 94% of their hard-earned money. Our nation has since ended such oppressive practices by a great amount, but there still remains much to be done to further curtail the federal government's attempts at increasing federal spending at every turn, which usually leads to more and more creative forms of taxation for the American people.
My question is how does the Socialist government in France expect to encourage economic growth in the private sector by increasing taxes exponentially? The answer is, they don't. The nations of Europe who have been socialist for the better part of the past 75 or 80 years have suffered various degrees of malaise. The current economic uber-Depression within the Eurozone is being blamed on the practice of economic austerity, yet when one looks at each nation's budget to determine just how accurate this description is, those nations are really not properly implementing austere economic practices. Look at the following graphs supporting this claim from an earlier blog on President Obama's proposed budget that seeks to implement austerity of various European nations within the Eurozone:
Thus, as one can clearly see, even the conservative government of France has been spending profligately. A government cannot properly implement an economic policy of austerity if it is still running up a large deficit. While the French government's policy was to eliminate the national debt, it clearly failed, as the data on the graph shows.
Austerity can work, but it must be implemented correctly in order to do so. Latvia has proven that it can, and this article from March 15, 2013 disproves liberal Keynesian economist Paul Krugman (Courtesy of CNBC):
Krugman Can't Admit He Was Wrong on Austerity: Latvia PM
Published: Friday, 15 Mar 2013 | 12:56 PM ET
By: Katy Barnato
Latvia's Prime Minister hit back on Friday at Paul Krugman's criticism of Latvia's austerity measures, saying the Nobel Prize-winning economist has "difficulty admitting his own mistake."
"Krugman famously said back in December 2008 that Latvia is the new Argentina, it will inevitably go bankrupt, and now he has difficulty apparently admitting he was wrong and so he tries to seek some problems in how Latvia is recovering from the economic crisis," Latvian leader Valdis Dombrovskis told CNBC in an interview at the EU summit in Brussels.
"But I think that the mere fact that for the last two years we are enjoying rapid growth shows that it was probably the right strategy."
Latvia's government undertook a heavy dose of austerity after a credit boom led to an economic crash in 2008. The government undertook the biggest fiscal adjustment drive of any country in the European Union and gross domestic product (GDP) plunged 24 percent in 2009.
This commitment to fiscal prudence, and Latvia's subsequent growth of 5.5 percent in 2011 and 4.5 percent in 2012, has led the country to be feted by proponents of austerity, such as German Chancellor Angela Merkel.
(Read More: Used to Hardship, Latvia Accepts Austerity, and Its Pain Eases)
However, Krugman, who is known for his strictly anti-austerity stance, has remained consistent in his criticism of the Baltic state.
"The adulation over Latvia really tells us more about what the European policy elite wants to believe than it does either about the realities of Latvian experience or the fundamentals of macroeconomics," Krugman wrote in a blog post for the New York Times on January 2, entitled Latvia, Once Again.
"We're looking at a Depression-level slump, and 5 years later only a partial bounceback; unemployment is down but still very high, and the decline has a lot to do with emigration. It's not what you'd call a triumphant success story," he continued.
Latvian unemployment stood at 14.3 percent in 2012, according to the CIA's World Factbook. Emigration from Latvia has increased by 13 percent in the last decade, a trend that increased markedly since austerity measures were introduced, particularly among the younger, better-educated generation.
Earlier this year, Dombrovskis said the success of his austerity drive meant there was now scope for some stimulus measures such as lowering labor taxes and increasing public sector wages.
(Read More: Role Model of European Austerity Turns to Stimulus)
In his interview with CNBC on Friday, Dombrovskis said the austerity versus growth debate was a false one.
"We need both. We need to regain our financial stability and we need to regain visibility vis-a-vis the financial markets. But at the same we need measures to stimulate economic growth, and actually, to grow out of those problems," he said.
Krugman, meanwhile, is a veteran of spats with Baltic States regarding austerity measures. Last June, his criticisms about Estonia provoked a spirited reply from the country's president.
"Yes, what do we know? We're just dumb and silly East Europeans. Unenlightened. Someday we too will understand," wrote Estonian President Toomas Hendrik Ilve on his Twitter account.
(Read More: Estonian Austerity, Paul Krugman, and Twitter: All the Elements of an Opera?)
- By CNBC's Katy BarnatoPaul Krugman may be an economist, but as a member of the intellectual elite of the Left, he does not know anything about economic growth or balancing a budget.
Meanwhile, France's economic growth since President Hollande took office is one of sheer and utter failure, according to Channels:
And yet more details are given by Mark Deen of Bloomberg Business Week:France Slips Into Shallow Recession One Year Into Hollande’s Presidency
Posted by: Channels Television Posted date: May 15, 2013 In: World News | comment : 0 Comments and 0 ReactionsMinutes after taking office as the new French president one year to the day on Tuesday (May 15) Francois Hollande had to stand under pouring rain at the tomb of the unknown soldier in Paris. In the year since the Socialist took over power, he could be forgiven for thinking that it has been raining on his presidency ever since.
Official data released on Tuesday showed that the country had slipped into a shallow recession, dealing a blow to Hollande’s electoral promise of more growth and less unemployment.This is France’s first recession in four years and official data from statistics agency INSEE showed the economy contracted by 0.2 percent in the first three months of this year — the second quarter of negative growth that marks the official definition of a recession.It blamed weak exports, investment and household spending for the decline, a view shared by some leading economists.“Overall, I would say France is partly victim of the recession within the euro zone, especially in the south of Europe where Italy and Spain had GDP down 0.5 percent in Q1 and French exports declined 0.5 percent,” said Philippe Brossard, the Chief Economist of AG2R La Mondiale, a leading insurance company.“Italy and Spain are really the main trading partners to France and this largely explains why the French economy is so weak. Also, we had very weak domestic demand reflected in the fact that our fiscal policy has been rather severe with the taxpayer. And it reduced purchasing power for French consumers,” he added.In London, economists appeared somewhat more alarmed, saying France urgently needed to implement reforms to improve its competitivity and bring it back in line with that of Germany, the euro zone’s power house.“If the euro is to survive longer term in its current form, France needs to become competitive. And Hollande hasn’t really done much to achieve that aim at this stage. And as we see ongoing weakness in the growth story going forward, it’s going to make unemployment relatively high in France,” said James Shugg, the London-based Chief Economist of Westpac.“It’s going to make it more difficult for the French to achieve their budget deficit reduction targets and it’s going to push French debt to GDP ratios — already higher than those in Spain — to the sorts of levels that are going to really make investors whether France is sustainable in its current form,” he added.One year after his inauguration, Hollande faces a monumental task. Unemployment is now at a record high of well over three million, domestic consumption is low and falling and he has had to ask the European Commission for extra time for france to meet its budget deficit target of three percent of gross domestic product, a measure of economic growth.On the streets of Paris, the news appeared to be taken with resignation.“It’s the economic environment that’s to blame. Where he can be criticised is the fact that they didn’t… the fact that they minimised the crisis during the presidential campaign. But it’s not his fault, or his policy. He probably didn’t make very good choices. But the recession had already begun last year,” said one passer-by.Another passerby said that while the recession was small, it was nonetheless a warning signal.“It’s not like Portugal or Greece who are at minus five percent every year for the last three or four years. It’s a very strong warning that we’re getting at a time when we’re having to look at the pension system etc. So I think it’s a strong warning. But it’s not like being clobbered with a hammer,” he said.As for Hollande, who is probably remembering the moment he was inaugurated, he is probably hoping that France will be able to grow itself out of recession and debt by the time the next election comes around in 2017. Whether it does may largely depend on whether he is willing to grasp the nettle of forcing through unpopular reforms and spending cuts, analysts and critics say.
French Industrial Output Drops as Hollande Aims to Revive Growth
By Mark Deen May 07, 2013
French industrial output fell in March as President Francois Hollande struggled to keep Europe’s second-largest economy from falling into recession for the third time in four years.
Production (FPIPMOM) dropped 0.9 percent after climbing a revised 0.8 percent in February, national statistics office Insee said in Paris today. Economists forecast a 0.3 percent decrease, according to the median of 23 estimates in a Bloomberg News survey.
France’s economy remains under pressure from a domestic budget squeeze and weak euro-area demand at a time when President Francois Hollande is trying to revive economic growth and his own slumping popularity. At the same time, business confidence is weakening.
“Business surveys continue to point to a contraction in industrial activity,” said Pierre-Olivier Beffy, chief economist at Exane BNP Paribas in London. “Investment is due to decline further given poor confidence and low corporate margins.”
In France, confidence among manufacturing executives fell to 88 in April from 91 in March, according to Insee.
With joblessness at a record 3.22 million after the economy shrunk in the fourth quarter, Hollande is trying to trim the budget deficit and revamp the economy without further damaging growth.
The European Commission last week said that Hollande needs to make overhauling France’s labor laws and the pension system a priority. The Commission said last week that it expects the French economy to shrink 0.1 percent this year and allowed Hollande’s government more time to eliminate its budget deficit.
For France “it is very obvious that it is more reasonable to have an extension of the correction of the excessive deficit over two years,” Economic Affairs Commissioner Olli Rehn told reporters in Brussels May 3.
To contact the reporter on this story: Mark Deen in Paris at markdeen@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.netAnd then this from Yahoo! News:
Does France have right plan to revive its economy?
By SARAH DiLORENZO | Associated Press – 7 hrs ago
"PARIS (AP) — The man charged with reviving France's shrinking economy and attracting businesses to invest here is gaining a reputation for doing the opposite.
As the country's first-ever minister for industrial renewal, Arnaud Montebourg has told the world's largest steelmaker it is not welcome in France; exchanged angry letters with the head of an American tire company he was supposedly wooing; and scuttledYahoo's offer to buy the majority of a video-sharing website.
Montebourg, a 50-year-old lawyer from Burgundy, is the public face of President Francois Hollande's plan to revitalize Europe's second-largest economy, which is in recession and grappling with 11 percent unemployment. The plan is to make the French economy more competitive globally — especially for manufacturers — by making it easier to fire workers, offering a payroll tax credit and investing in small businesses.
Economists have praised the labor reforms as a step in the right direction. But mostly they say France's economic plan is all wrong: It is too complicated; it favors a top-down approach to innovation; and it ignores some of the most serious problems plaguing France's economy, such as high labor costs.
And then there is Montebourg, whose public spats with international companies and efforts to block layoffs are making France look like an unappealing place to do business.
In fairness to Montebourg, he's not so much the problem as he is the symbol of it, analysts say. Even if Hollande were to replace him — and that's looking increasingly likely — it's unclear whether the substance of the industrial renewal strategy would change.
The sheer size of France's economy has cushioned it somewhat from the worst of Europe's debt crisis, which has brought depression-level unemployment to countries like Spain and Greece. It is home to many huge industrial companies, like EADS, parent company to plane-maker Airbus; Total, the world's fifth-largest investor-owned oil company; and Sanofi, the world's fourth-largest pharmaceutical company. France is also a cradle for design, high fashion and fine wine, embodied by world leaders like LVMH and L'Oreal.
But make no mistake, analysts warn: The French economy, which had no growth in 2012 and shrank at an annualized rate of 0.8 percent in the first three months of 2013, is in slow-motion free fall.
Profit margins at French companies are the lowest they have been in 30 years. In the past decade, one in six industrial jobs has been lost. And economists forecast unemployment will rise to 11.6 percent next year.
Hollande says the decline in French manufacturing — from 16 percent of gross domestic product in 1999 to 10.7 percent a decade later — is at the heart of his country's stagnation. Many European economies have seen a similar trend, but France's slide has been more pronounced than most. Reverse the decline, Hollande believes, and you reverse the stagnation.
'The goal of reindustrialization is a perfectly legitimate goal. The only question to ask for France is ... whether it's too late,' says Elie Cohen, an economist at Sciences Po university in Paris. "It's probably too late."
Serge Lelard, who started a plastics company called Microplast in 1984, feels the same way. Montebourg, who buzzes around France touring businesses on a near-weekly basis, recently visited Microplast's factory outside Paris. He held it up as an example of the kind of small manufacturing businesses that France needs to keep and attract.
But Lelard is dismissive of the government's reindustrialization plan. He says there is too much talk and not enough action that addresses the competitive disadvantages French companies face in the global marketplace.
Microplast, which sells plastic bits that connect the wires in cars, has struggled along with the French auto industry. Lelard is pessimistic about the company's chances of survival.
France's economic challenges are rooted in government policies that protect workers at the expense of their employers. It has the highest payroll taxes in the European Union to fund generous health and retirement benefits. It has the highest tax on capital, which discourages investment. It aggressively fights companies that try to outsource jobs. And it makes firing an employee expensive and difficult.
These problems have existed for decades, but a growing global economy and France's control over its own currency and spending policies masked them. Slowly, however, those masks have been removed.
First, the euro was introduced at the turn of the millennium. Europe's strongest economies, like Germany, gained a competitive advantage: The value of the euro, held down by the weaker nations that used it, made German exports more affordable overseas. By contrast, countries like France suffered because the euro was valued more highly than their own currency, making French exports more expensive for buyers outside the eurozone.
Then the global recession dried up demand for French products at home and around the world. Finally, Europe's debt crisis prompted the government to cut spending and raise some taxes to reduce its budget deficit.
With these crutches pulled away, France's industry was pushed to its breaking point.
But Hollande, a Socialist, came to power last year by promising more of the same: He vowed to spark growth without cutting generous benefits.
There are three main planks to Hollande's reindustrialization plan: up to a 6 percent rebate for companies on some payroll taxes, labor reforms that make it easier to fire employees or cut their salaries during hard times, and a public investment bank with 42 billion euros ($55 billion) to invest in small businesses.
But new programs are announced frequently. Millions in grants and other incentives have been promised for everything from spurring the construction of electric cars to bringing robots to factory floors.
'That's exactly what you should not do. They're ... complicating instead of simplifying,' says Anders Aslund, an economist with the Peterson Institute for International Economics in Washington. Aslund says the government should avoid giving grants for specific industries and instead help all industries — with permanent tax breaks, for example.
Last year, Montebourg unveiled a plan to give several hundred million euros in grants and tax credits to car companies and subcontractors in an effort to encourage the development of electric cars and batteries.
But economists say the French government should not try to invent successful sectors. Never mind that France is an unlikely place to incubate an auto revolution. Its car industry can't compete with global rivals like Volkswagen and Hyundai that have lower labor costs and stronger cultures of innovation. For example, French research institutions lack the strong links to industry that allow entrepreneurs in other countries to quickly convert lab discoveries into products.
The flip side of France's efforts to create booming new industries is its aversion to letting struggling ones die out.
'A saved job is always a victory,' Montebourg, who is on the far left of the Socialist party, said at a recent lunch with journalists. He declined to be interviewed for this story.
But that's not how many economists see it. Part of Germany's success is its willingness to let some lower-level manufacturing jobs move to other countries, says Christian Ketels, a researcher at Harvard Business School. That allows German companies to stay competitive and keep high-skilled, higher-paid jobs at home.
"To my knowledge, France is really the only country in Europe that is upset about outsourcing," says Aslund.
One of the most glaring examples of this no-job-left-behind policy has been France's campaign to block steelmaker ArcelorMittal from shuttering the two blast furnaces at its processing plant in Lorraine, eastern France — in spite of the fact that local mines are used up, it's far from ports and its furnaces are out of date.
That plant is 'a perfect example of what you should close down,' says Aslund.
Instead, Montebourg took up the cause, threatening to nationalize the plant and declaring that the company wasn't welcome in France. It's unclear how much of this rhetoric was in line with government policy — the suggestions of nationalization were quickly struck down by the prime minister — but the affair deeply bruised France's reputation as a serious place for business. In the end, the company will close the furnaces but other steel-processing operations at the plant will continue.
Montebourg also tried to save a Goodyear plant in northern France by asking American tire manufacturer Titan if it was willing to invest. The answer from Titan's CEO mocked France's work practices in an embarrassing public letter — and Montebourg took the bait, shooting back an equally chest-thumping missive.
There looks to be little hope of saving the Goodyear plant, but litigation could drag on for months if not years.
Just this month, Montebourg vetoed Yahoo's attempt to take a 75 percent stake in video-sharing website, Dailymotion. Citing concerns about Yahoo's health as a company, Montebourg said the government, which owns a stake in Dailymotion's owner, France Telecom, would only approve a 50-50 deal. Yahoo walked away.
Business owners say that the government remains more of a hindrance than a help. There are too many regulations and too much paperwork even for mundane tasks.
But the fundamental problem French manufacturers face is simple: Workers get paid too much to make products that cost too little.
The French government argues that its hourly labor costs are not much higher than Germany's — 34.20 euros per hour on average in 2012 versus 30.40 euros per hour, according to Eurostat. But France's range of products — with some notable exceptions, like Chanel handbags or Moet & Chandon champagne — is generally of a lower quality than Germany's.
In other words, if it costs the same to make a Peugeot as it does a BMW, guess which company is going to have more left over to reinvest in innovation? And investing in innovation is how you make a Peugeot more like a BMW.
And it's not even that France pays top dollar to attract the best workers. Its wages are above average, though not spectacularly so. But its payroll taxes are the highest in Europe.
The government's new 'competitiveness tax credit,' which will eventually give companies up to 6 percent back on some workers' salaries, is a step toward lessening this burden for a time. Early surveys, however, show few companies are taking advantage of it, according to study by consultancy Lowendalmasai.
How come? The paperwork is too complex.
___
Follow Sarah DiLorenzo at http://twitter.com/sdilorenzo.
***
Just like the Democrats in the U.S. hinder economic progress with their high taxes and increased spending on socialist welfare programs, so, too, does the Socialist Party in France, only to a greater extreme. And just as this article suggests, the French government continues to grow out of control, with the tax break laws the government under Hollande are offering often being too complex for most to understand. On May 6, RT.com reported that France plans to go away from its practice of austerity:
People take part in a demonstration on May 5, 2013 in Paris, called by Jean-Luc Melenchon, leader of Front de Gauche (Left Front) left wing party, to protest "against the austerity, against the finance and to ask for a Sixth Republic". (AFP Photo)
"Finance Minister Pierre Moscovici says French austerity measures are at an end, instead opting for growth. This further complicates the strained relationship between the eurozone’s two largest economies.
'We’re witnessing the end of the dogma of austerity,' Moscovici told Europe 1 radio on Sunday.
“We’ve been pleading for a growth policy for a year. Austerity on its own impedes growth.”
The comments followed German Finance Minister Wolfgang Schaeuble’s offer to provide flexibility on deficit cutting, pushing France closer to austerity measures it doesn’t want to implement.
The remarks also coincided with as tens of thousands of far-left French protesters who took to the streets on Sunday to mark President Francois Hollande’s first year in office. Economic conditions have only worsened under Hollande and France has slipped deeper into recession and unemployment has hit a record-high of 10 percent.
President Hollande was elected on a promise to end austerity and has repeatedly complied with Germany’s austerity measures despite complaints from the French people.
France, the eurozone's second largest economy, showed signs of recovery in the first quarter of 2013, and the EU Commission predicted an overall 1% contraction in 2013.
In comparison, the 17 countries in the eurozone contracted by 0.6% in 2012.
The EU has targeted lower budget deficit of all 17 member states, and France has two years to reach the 3% GDP ceiling, down from its 4.8% mark in 2012. The French government plans to achieve the rate by mid-2014.
President Hollande and France have been tiptoeing around Germany’s call for austerity, stirring a ‘friendly tension’ instead of direct opposition to Chancellor Merkel’s agenda. Hollande has not continued the legacy of ‘Merkozy’, a warm and public alliance between the German Chancellor and predecessor, Nicolas Sarkozy.
France is in a difficult position: either continue its power alliance with Germany and unpopular support for austerity, or break with Germany and instead align itself with Europe’s troubled ‘south’ – Italy and Spain. Austerity is needed, but highly unpopular in France, so Chancellor Merkel provides a convenient scapegoat for government officials.
The eurozone Composite PMI, which measures business activity and is an indicator of the economic climate, isn’t encouraging for either France or Germany. April’s figures have signalled a contraction in manufacturing as well as decline in business activity.
The numbers missed the 50-level benchmark, between growth and contraction. In March the level was at 46.5, and it edged up to 46.9 in April, still shy of the ‘growth’ threshold.
The purchasing managers indexes (PMIs) also showed that Germany is now suffering a contraction in business activity that has long dogged France, Italy and Spain.
In a drastic, but expected move on Thursday, the European Central Bank cut its key interest rate from 0.75% to 0.5%, a clear indication that the crisis is deepening, and not improving. The rate determines the cost of over €850 billion in ECB outstanding loans. In theory the lower rate will bring relief to southern European borrowers, but the lowered rate is actually likely to be more favorable to Germany’s economy, as it will only increase the interest rates small businesses will have to pay on loans.
Small businesses in Spain, Italy and Portugal paid much higher rates for loans than their German counterparts, according to ECB’s January, February, and March monthly reports.Again, I ask the question: how can one justify blaming the practice of austerity economics when no one in the Eurozone seems to be practicing this correctly? Latvia has made this work beautifully for them, and if France, as well as other Eurozone nations, actually sought to operate austerity from a perspective of economic growth as opposed to simply "paying off a debt," they, too, might experience the economic miracle Latvia does.
I decided to look up more information on the general practice of austerity within the Eurozone. Here is what I found:
"During the European sovereign-debt crisis, many countries embarked on austerity programs, reducing their budget deficits relative to GDP from 2010 to 2011. For example, according to the CIA World Factbook Greece improved its budget deficit from 10.4% GDP in 2010 to 9.6% in 2011. Iceland, Italy, Ireland, Portugal, France, and Spain also improved their budget deficits from 2010 to 2011 relative to GDP.But the austerity policy of the Eurozone achieves not only the reduction of budget deficits. The goal of economic consolidation influences for example the future development of the European Social Model which unfolds already liberalisation tendencies in the Eurozone as a whole.
However, with the exception of Germany, each of these countries had public-debt-to-GDP ratios that increased (i.e., worsened) from 2010 to 2011, as indicated in the chart at right. Greece's public-debt-to-GDP ratio increased from 143% in 2010 to 165% in 2011. This indicates that despite improving budget deficits, GDP growth was not sufficient to support a decline (improvement) in the debt-to-GDP ratio for these countries during this period. Eurostat reported that the debt to GDP ratio for the 17 Euro area countries (EA17) together was 70.1% in 2008, 80.0% in 2009, 85.4% in 2010, 87.3% in 2011 and 90.6% in 2012. Further, real GDP in the EA17 declined for six straight quarters from Q4 2011 to Q1 2013.
Unemployment is another variable that might be considered in evaluating austerity measures. According to the CIA World Factbook, from 2010 to 2011, the unemployment rates in Spain, Greece, Ireland, Portugal, and the UK increased. France and Italy had no significant changes, while in Germany and Iceland the unemployment rate declined. Eurostat reported that Eurozone unemployment reached record levels in March 2013 at 12.1%, up from 11.6% in September 2012 and 10.3% in 2011. Unemployment varied significantly by country.
Economist Martin Wolf analyzed the relationship between cumulative GDP growth from 2008-2012 and total reduction in budget deficits due to austerity policies (see chart at right) in several European countries during April 2012. He concluded that: "In all, there is no evidence here that large fiscal contractions [budget deficit reductions] bring benefits to confidence and growth that offset the direct effects of the contractions. They bring exactly what one would expect: small contractions bring recessions and big contractions bring depressions." Changes in budget balances (deficits or surpluses) explained approximately 53% of the change in GDP, according to the equation derived from the IMF data used in his analysis.
Economist Paul Krugman analyzed the relationship between GDP and reduction in budget deficits for several European countries in April 2012 and concluded that austerity was slowing growth, similar to Martin Wolf. He also wrote: "... this also implies that 1 euro of austerity yields only about 0.4 euros of reduced deficit, even in the short run. No wonder, then, that the whole austerity enterprise is spiraling into disaster."
One should take this "analysis" with a grain of salt. Again, we have a liberal Keynesian economist in Krugman and British Labour Party member Martin Wolf who believe that the only way for a government to achieve economic salvation is through bigger government. Well, as the graphs above show, that is exactly what happened. The government of France continued to oppressively tax the entire French population and create more and bigger government infrastructures through entitlement programs, and what happened? The dreaded uber-Depression. Below, I will describe more of economist Philipp Bagus' thoughts on the matter, as was posted on my blog a few days ago:
The Myth of Austerity
Mises Daily: Friday, November 30, 2012 by Philipp Bagus
"Many politicians and commentators such as Paul Krugman claim that Europe's problem is austerity, i.e., there is insufficient government spending. The common argument goes like this: Due to a reduction of government spending, there is insufficient demand in the economy leading to unemployment. The unemployment makes things even worse as aggregate demand falls even more, causing a fall in government revenues and an increase in government deficits. European governments pressured by Germany (which did not learn from the supposedly fateful policies of Chancellor Heinrich Brüning) then reduce government spending even further, lowering demand by laying off public employees and cutting back on government transfers. This reduces demand even more in a never ending downward spiral of misery. What can be done to break out of the spiral? The answer given by commentators is simply to end austerity, boost government spending and aggregate demand. Paul Krugman even argues in favor for a preparation against an alien invasion, which would induce government to spend more. So the story goes. But is it true?
First of all, is there really austerity in the eurozone? One would think that a person is austere when she saves, i.e., if she spends less than she earns. Well, there exists not one country in the eurozone that is austere. They all spend more than they receive in revenues. (Graphs shown above.)
In fact, government deficits are extremely high, at unsustainable levels, as can been seen in the following chart that portrays government deficits in percentage of GDP....
...Imagine that a person you know spends 12 percent more in 2008 than her income, spends 31 percent more than her income the next year, spends 25 percent more than her income in 2010, and 26 percent more than her income in 2011. Would you regard this person as austere? And would you regard this behavior as sustainable? This is what the Spanish government has done. It shows itself incapable of changing this course. Perversely, this "austerity" is then made responsible for a shrinking Spanish economy and high unemployment.
Unfortunately, austerity is the necessary condition for recovery in Spain, the eurozone, and elsewhere. The reduction of government spending makes real resources available for the private sector that formerly had been absorbed by the state. Reducing government spending makes profitable new private investment projects and saves old ones from bankruptcy.
Take the following example. Tom wants to open a restaurant. He makes the following calculations. He estimates the restaurant's revenues at $10,000 per month. The expected costs are the following: $4,000 for rent; $1,000 for utilities; $2,000 for food; and $4,000 for wages. With expected revenues of $10,000 and costs of $11,000 Tom will not start his business.
Let's now assume that the government is more austere, i.e., it reduces government spending. Let's assume that the government closes a consumer-protection agency and sells the agency's building on the market. As a consequence, there is a tendency for housing prices and rents to fall. The same is true for wages. The laid-off bureaucrats search for new jobs, exerting downward pressure on wage rates. Further, the agency does not consume utilities anymore, leading toward a tendency of cheaper utilities. Tom may now rent space for his restaurant in the former agency for $3,000 as rents are coming down. His expected utility bill falls to $500, and hiring some of the former bureaucrats as dishwashers and waiters reduces his wage expenditures to $3,000. Now with expected revenue at $10,000 and costs at $8,500 the expected profits amounts to $1,500 and Tom can start his business.
As the government has reduced spending it can even reduce tax rates, which may increase Tom's after-tax profits. Thanks to austerity the government could also reduce its deficit. The money formerly used to finance the government deficit can now be lent to Tom for an initial investment to make the former agency's rooms suitable for a restaurant. Indeed, one of the main problems in countries such as Spain these days is that the real savings of the people are soaked up and channeled to the government via the banking system. Loans are practically unavailable for private companies, because banks use their funds to buy government bonds in order to finance the public deficit.
In the end, the question amounts to the following: Who shall determine what is produced and how? The government that uses resources for its own purposes (such as a "consumer-protection" agency, welfare programs, or wars), or entrepreneurs in a competitive process and as agents of consumers, trying to satisfy consumer wants with ever better and cheaper products (like Tom, who uses part of the resources formerly used in the government agency for his restaurant).
If you think the second option is better, austerity is the way to go. More austerity and less government spending mean fewer resources for the public sector (fewer "agencies") and more resources for the private sector, which uses them to satisfy consumer wants (more restaurants). Austerity is the solution to the problems in Europe and in the United States, as it fosters sustainable growth and reduces government deficits.
Lower GDP?
But does austerity not at least temporarily reduce GDP and lead to a downward spiral of economic activity?
Unfortunately, GDP is a quite misleading figure. GDP is defined as the market value of all final goods and services produced in a country in a given period.
There are two minor reasons why a lower GDP may not always be a bad sign.
The first reason relates to the treatment of government expenditures. Let us imagine a government bureaucrat who licenses businesses. When he denies a license for an investment project that never comes into being, how much wealth is destroyed? Is it the expected revenues of the project or its expected profits? What if the bureaucrat has unknowingly prevented an innovation that could save the economy billions of dollars per year? It is hard to say how much wealth destruction is caused by the bureaucrat. We could just arbitrarily take his salary of $50,000 per year and subtract it from private production. GDP would be lower.
Now hold your breath. In practice, the opposite is done. Government expenditures count positively in GDP. The wealth destroying activity of the bureaucrat raises GDP by $50,000. This implies that if the government licensing agency is closed and the bureaucrat is laid off, then the immediate effect of this austerity is a fall in GDP by $50,000. Yet, this fall in GDP is a good sign for private production and the satisfaction of consumer wants.
Second, if the structure of production is distorted after an artificial boom, the restructuring also entails a temporary fall in GDP. Indeed, one could only maintain GDP if production remained unchanged. If Spain or the United States had continued to use their boom structure of production, they would have continued to build the amount of housing they did in 2007. The restructuring requires a shrinking of the housing sector, i.e., a reduced use of factors of production in this sector. Factors of production must be transferred to those sectors where they are most urgently demanded by consumers. The restructuring is not instantaneous but organized by entrepreneurs in a competitive process that is burdensome and takes time. In this transition period, when jobs are destroyed in the overblown sectors, GDP tends to fall. This fall in GDP is just a sign that the necessary restructuring is underway. The alternative would be to produce the amount of housing of 2007. If GDP did not fall sharply, it would mean that the wealth-destroying boom was continuing as it did in the years 2005–2007.
Conclusion
Public austerity is a necessary condition for private flourishing and a rapid recovery. The problem of Europe (and the United States) is not too much but too little austerity — or its complete absence. A fall of GDP can be an indicator that the necessary and healthy restructuring of the economy is underway."
This is further proof that the French government did not implement the policy of austerity properly. As Bagus stated, they spent more money than they had in tax revenue. That is not austerity. That is simply perpetuating the culture of socialist policies European governments have implemented for decades. It will only continue to grow worse under President Hollande if he continues to tax the French people oppressively.
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