Monday, July 09, 2007

Sarkozy The Supply-Sider

President Sarkozy new economic plan contains both good and bad news. The good news is that he wants to cut taxes by €11 billion per year, a much needed relief for the over-taxed French economy. The bad news is that he doesn't want to finance these cuts by spending cuts. Instead he wants to increase the deficit further. France already has a 2.5% of GDP government deficit-very high considering the current cyclical boom and Sarkozy's unfinanced tax cuts is likely to push the structural deficit even higher.

Sarkozy hopes this will increase growth, yet theoretical net effect of such a policy is ambiguous as the improvement in incentives from the tax cuts is counteracted by the "crowding out" effect of deficits as well as the income effect on work efforts. And as the theoretical effect is ambiguous, the likely actual net effect is likely to be small in either direction.

Combined with his attacks on the ECB for pursuing a "too tight" (i.e. insufficiently inflationary) monetary policy, a clear picture emerges of Sarkozy as a supply-sider. Supply-siders are basically Keynesians with their love for budget deficits and a "accommodative" (i.e. inflationary) monetary policy. Only unlike left-liberal Keynesians like Paul Krugman, they wishes to achieve the deficits by reducing taxes rather than increasing spending and they also generally use free market rhetoric and some free market policies (apart from tax cuts usually also deregulation and free trade). Sarkozy fits this description perfectly, although being a French politician he also uses some statist rhetoric and favors a certain degree of protectionism.


Blogger Flavian said...

Supply-siders are not altogether wrong.

Tax cuts may under some circumstances actually increase economic actvity in the taxed sector and thus finance themselves.

Secondly the message is positive and does not provoke popular protests.

High taxes may be a bigger economic problem than a budget deficit in a growing economy.

And I also think that one of the greatest pros of a gold standard would be low real and nominal interest rates.

Altogether correctly understood supply-side economics is OK.

12:49 AM  
Blogger stefankarlsson said...

I didn't say they are wrong altogether, just that they aren't right altogether.

Self-financing tax cuts can occur, but only during extreme circumstances, such as when initial tax rates are extremely high or when the tax base is extremely mobile. The corporate income tax is perhaps the closest one today due to the higher mobility of corporate investments as well as their greater ability to conduct tax planning.

As for it being popular, well, that doesn't make it right.

Higher taxes may be a bigger problem, but it may also be a smaller problem because the net effect as I said is ambiguous.

As for your remark about the gold standard, it has nothing to do with this as supply-siders don't favor any gold standard in any real sense.

9:05 AM  
Blogger Flavian said...

Neither did I say that supply-siders are altogether right.

In my opinion supply-side economics is an interesting challenge to "conventional wisdom" and I also think that any economist ought to try to answer their questions.

If so one can learn a lot from those "heretics". And I do think that supply-siders are much closer to austrian theory than monetarists.

And by the way, although I consider Mises one of the most important economists of all time, I think he may have been wrong on some issues.

5:00 PM  
Blogger stefankarlsson said...

Well, virtually no one agrees 100% on all issues with anyone else and I too think Mises was wrong on some issues, most notably philosophy of science, statistics and exchange rate theory.

But there is a big difference between Mises' few and less important errors and the more serious errors of supply-siders with regards to their pro-deficit and pro-inflation views.

10:17 PM  

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