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Monday, November 11, 2013


Flipping through the New York Times front section today, I came across a story about the Maduro government in Venezuela sending the military in to take over a five-store retail chain selling electronics goods because they were purportedly selling at prices that were too high and Christmas is coming (and some municipal elections).  Inflation is not the result of disastrous government policy, it's the retailers' fault!  Now the military has marked down all the stock and is liquidating it at the marked-down prices.  That's quite an approach to retail insolvency they have in Venezuela. Don't bother with that chapter 7 or 11 stuff or hire Gordon Brothers to run your liquidation, just have the military do it all!  

I've written before about the use of this strategy by Argentina and some other Latin American governments -- when a party takes power on a program of increasing hand-outs to the lower class, it has to perpetually confiscate other people's property to fulfill its promises (because if you're getting handouts just for voting, why would you ever bother to get a job and work hard to create your own savings?).   And those who try to hang on to their business and savings have to be marginalized and demonized, so that public sympathy cannot build in their favor and jeopardize the officeholders' hold on power, so the confiscation program is always accompanied by rhetoric in which the confiscator aligns himself or herself with the popular will and the defenders of private property and savings are characterized as unpatriotic enemies of the state.  This is "chavismo" or "chavismo -lite" depending on how far the party in power goes, and it has been a successful electoral strategy in Argentina, Ecuador, Venezuela,  and so on.  Recently Cristina Fernandez, the president of Argentina, succeeded, for example, in disemboweling Clarin, the leading media business in that nation, on anti-trust grounds, although most would say it was because Clarin no longer gave her the unconditional support she thought was her due.  And here you can see Cristina arguing that credit rating agencies are being used by the media and people with interests contrary to Argentina to fool people.

Thus, the Times story notes that Maduro and his cronies claim "his government is facing an 'economic war' waged by what he calls the right-wing opposition in Venezuela and its backers in Colombia and the United States."  Standard operating procedure.

Of course, voters here in the United States are far too intelligent to subscribe to these kind of populist paranoid fantasies, aren't we?  No intelligent voter would ever fall for the argument that persons defending their businesses and savings against politicians' pandering to lower-income votes are "waging an 'economic war'" against the nation.

Reading on to the opinion page, I saw Paul Krugman titled his column for the day  "The Plot Against France".  Wow.  A plot?  Sure sounds sinister.   Who are the plotters?  Krugman identifies "Standard & Poors ... The Economist  ... CNN Money ... and Mr Olli Rehn, Europe's commissioner for monetary and regulatory  affairs".  An interesting cabal - 2 publications, a rating agency and a bureaucrat.  Remarkably, it's the very same coalition that Cristina in Argentina and Maduro in Venezuela are fighting against - media, rating agencies and non-complicit government figures. 

And what does the plot consist of?   In S&P's case, they downgraded France.  Quelle horreur!  And the media have published critical stories about France's external debt.  And Mr. Rehn? He called on France to stop raising taxes.  To Krugman, these evildoers are "using debt fears to advance an ideological agenda".  That "right wing opposition" that Maduro is fighting against, is everywhere!

Fortunately, we have Krugman to set them straight.  Because France's fiscal policy is "exemplary" he says.  And their "fiscal prospects look distinctly nonalarming".  This of course from the man who in January 2008 titled Europe "The Comeback Continent".  But hey, no one's perfect.  Let's look at the exemplary fiscal policy of France -- since debt is incurred in nominal dollars,  the following table compares France's general government debt to its nominal GDP. 

Here, in nominal numbers, are the debt and GDP numbers for France (trillions of euros):

Increase from first year to last.
Nominal government debt outstanding[1]
(50% increase)
Nominal GDP[2]
(<1% increase)

As the table shows, France has increased its debt by 50% over 6 years, yet its nominal GDP has barely budged.  For every 50 euros of additional debt, France got less than 1 euro of additional income. Which clearly puts a strain on its debt servicing capability.

Per the IMF, France has run federal budget deficits > 3% of GDP for 6 straight years. That's a pretty long experiment with Keynesian stimulus. Clearly its multiplier is bumping along the zero bound and there is no evidence for any economic growth to be gained by continued deficit spending.

To address France's debt problem, Krugman advocates "temporary tax hikes" which he says are better than spending cuts.  He cites to "research from the IMF" but the link just runs to one "working paper" which says it does not reflect the official views of the IMF.  In fact, there are many research papers the IMF has published on the subject of tax vs. spending multipliers and they find many different things, including some that find tax multipliers to be greater than spending multipliers, the antithesis of Krugman's position.  In general, the consensus is that fiscal multipliers are small for developed nations whether the policy involves tax or spending changes.

As far as France goes, with government spending constituting 56% of GDP, and a deficit of 4%, obviously tax revenue is already 52% of GDP.  All that is left to "temporarily" tax is 48% of the economy! While at the same time, the larger share of the economy already captured by the government is off limits to the Krugmaniacs of the world.   France's debt burden is to be borne entirely, under Krugmanian policy, by taking more from the private sector and cutting back privately funded consumption.   And those who take a different perspective are just "plotters against France".

Unfortunately it looks like the chavismo model of political economy is moving north with the Krugmaniacs of the world serving as its mules.  I think the northern  version needs a new name which I've decided should be "Krugismo".  But it might behoove the Times to look at what happened to Clarin and think twice about what happens to elite organizations and freedom of speech in the chavismo / Krugismo model.

[1] Source: Eurostat
[2] Source: IMF