So, you want to be like France ?

    By Donna Cole


 The NY Times' Paul Krugman was on CNBC's Squawk Box yesterday (7/11) talking about his ideas of what the government should do to fix the economy (video, runs just over 13 minutes). Krugman is probably the loudest voice of Keynesian economic theory in America, if not the world. He advocates things like massive government spending in times of economic trouble with governments taking on massive amounts of debt in order to get the cash to spend, then worry about that debt later when the economy improves, and high levels of taxation to support a welfare state. Keynesian economists always have this pay it later attitude, or as Keynes himself famously said, "In the long run we are all dead." He was basically saying not to worry about debt.



 It was something that Krugman said on this show that I found interesting and now want to write about. One of the hosts tried to pin down Krugman on what percentage of GDP (Gross Domestic Product) should be government spending. Right now the U.S. is at roughly 25%, which I think is too high. Krugman tried to avoid being held to a certain number, he talked about how wonderful Sweden's economy is, how wonderful health care in France is (I nearly choked), that Europe did great economically in the past 30 to 40 years (I nearly choked again) and that it was the creation of a common currency, the Euro, that caused their current problems. I actually agree a little bit with him there, on the currency part, but it was not the only cause of Europe's problems. Massive debt created by their welfare states is their main problem.


 However, the host continued to press Krugman for a number and he said, "When it got above 50, then I start to wonder." So, Krugman is fine with government spending accounting for up to 50% of GDP but no more. He went on to give the old liberal line that once the economy gets back on track, the government can then cut spending, and pay down debt. History has shown us that while liberal economists have said these things for nearly a 100 years, they never cut spending on the backside. They use the increased spending to raise budgetary baselines and grow the size of government. Then, when the good times come, they say we are flush with revenue so don't worry about these high budget levels. The next time a downturn comes, it only makes economic trouble worse.


 Since many liberals constantly opine about the wonders of European social democracies, especially France. I thought would could do some economic comparisons between the United States and France. France has had Krugman's dream economy for 40 years, that being government accounts for right at 50% of GDP (2006, 50.1% and 2010, 49.3%) and it has high levels of taxation to fund the welfare state. So, I think it is a proper model to look at and see how this high level of government interference in the economy effects it. These first two charts show France and U.S. GDP growth rates from 1980 to 2012.

 The first thing that should strike you from these charts is the top number on each. The French charts maxes out at only 1.5% while the U.S. chart goes up to 10%. The French GDP grew at an average yearly rate of 0.48% from 1978 to 2012. While the U.S. GDP grew at a yearly average of over 3.0%. (Source links: French data, U.S. data.)


 What could be causing the French economy to be so stagnant ? High levels of taxation. The French government takes over 40% of GDP out of the private economy in taxes in order to fund their welfare state. The U.S. takes just over 25%. The average French worker pays just under 50% (49.3% in 2010) in income tax, in the U.S. a worker pays just under 30% (29.7% in 2010). (Source links: French data, U.S. data.)


 This high taxation causes several things to happen. Business has less cash on hand to expand, develop new products, and exploit new markets, this drags down growth. The high taxes on the individual gives that individual less money to spend in the private economy, with less cash changing hands, growth is again slowed. It is the beginning of a cycle, the consumer has less cash to spend on products and services produced, so business profits do not rise, almost no growth occurs and high taxation creates it all. This slow, to no, growth causes even more problems. But before we leave these charts and look at those problems, I would like to make one more brief point about them.


 One of the ideas of this high amount of government spending as part of GDP is to insulate the economy from the ups and downs of outside market forces. In other words, by not letting the good times grow too high, the bad times will not be so low. If you notice in these charts, nearly all the French economic bad times mirror the U.S. chart for downturns. They cannot insulate themselves from outside market forces, and by stifling the good times it only makes the bad times hurt that much worse because nothing much was gained in times of growth. Now, back to the charts, this time unemployment rates.

 The first thing you should notice on these charts is the baseline of each. The French chart's bottom is 7%, the U.S. chart is 2%. While the U.S. has high levels of unemployment now, which massive government spending did nothing to help by the way, historically the U.S. has an average unemployment rate of 5.8%. I looked back at the unemployment rate in France from 1984 to 2012 and found they have had an average rate of  9.7% over those 28 years. Proof that huge amounts of government spending via high taxation not only cannot create wealth generating jobs, it suffocates the growth of the people who actually could create these type jobs. As with all economics, actions create results and these results can be clearly demonstrated to predict what similar future actions results will be.


 With this long term high unemployment rate, come long term unemployed people. In France, the percentage of unemployed people considered long term unemployed is around 40%. That is year after year, not just due to the recent economic downturn. Historically, the U.S. average has been around 11% long term unemployed. That is 11% of the unemployed. This number began to spike up in 2009, to 16.3%, and to 29% in 2010. So, why has France's long term rate been so high and now the U.S. numbers spike up ?


 In France, it partly has to do with stagnant long term growth caused by the reasons I listed above. In the U.S., recovery has been slowed by government policy. Uncertainty about Obamacare, future tax increases, heavy handed regulation and by keeping interest rates artificially low banks are unwilling to risk capital for business loans.


 But, this long term unemployment is also caused by another reason, this reason is why France has a steady high rate, and the U.S. rate has so dramatically spiked up. In France, unemployment compensation is nearly unlimited, and as it was extended and extended in the U.S., to 99 weeks, the numbers of those considered long term unemployed went up right along with the extensions. This is not to say all unemployed people sit around happy to live on unemployment checks and don't care to look for work, but a certain percentage do.


 Since unemployment compensation is a social program, we must look at non health care, government social spending (These statistics come from the same links above). The reason I look at non-health care spending is because France controls health care costs by rationing. They pay health care providers less, so they provide less service. Yes, all the basic services are there, but old folks are not getting things like knee replacements, they get a cain. Obamacare will bring this same type of rationing, but that is a discussion for another time.


 France spends about 30% of GDP on social programs, welfare, unemployment compensation, state pensions, etc. The U.S. spends just under 17% (That number is quickly rising.). The French pay for their welfare state through high taxation, but the high taxation only grows the size of the welfare state. Like all economics, it is cause and effect, and the effect is a creation of an ever growing cycle. France has now trapped itself in this cycle.


 This is one of the reasons why the worldwide economic downturn hit Europe so hard. As they grew the size of their welfare states, this choked the private economy more and more, which led to less tax revenue caused by the high taxes in the first place. This then led these governments to heavily borrow in order to sustain the welfare states they created. When the global recession hit causing the European debt crisis, it hit these countries harder because government controlled so much of GDP. France, trapped in the hole it's own economic cycle created, now cannot grow it's economy out of the hole.


 So, France's economy will plod along for years to come with little or no growth, only servicing it's debt to keep the welfare state's head above water and no hope for a bright future filled with economic growth. That is the one saving grace the United States still has, our economy is still able to create robust growth, with the right political policies in place.


 When Paul Krugman was being interviewed on the CNBC program I referred to in the beginning of this piece, the host who asked him about what percent of GDP should be government spending also asked him about his vision of what America should look like. To paraphrase this question, "A free market capitalist society or a European social welfare state ?" Krugman said he wanted a, "free market social welfare state." This was the fantasy of Keynes, and is the fantasy of Krugman, other liberal economists, European socialists, President Obama and the Democrat Party. This is a fantasy because the two cannot exist together. The welfare state chokes the life out of the free market. France is more than adequate proof of this.


 So, ask yourself this: Do you really want to be like France ?