Monday, August 18, 2008

What Is to Be Done?

It has been obvious almost from the beginning that Sarkozy's economic policy was ill adapted to the global economic context that has taken hold since the subprime crisis. That policy was predicated on the assumption that France was doing worse than its economic peers owing to a combination of factors including restrictive labor market laws, the 35-hour week, early mean retirement age, and high social charges.

But now France's peers, including the most "liberal" of them, the United States, aren't doing well either. The Bush administration and Congress have already approved several stimulus measures, and the Federal Reserve has endeavored mightily to keep credit channels from freezing.

The French, meanwhile, have been slow to react. That now seems to be changing. The slowdown has finally focused the government's mind. Unfortunately, the chorus that once sang in unison has now devolved into cacophony. Christian de Boissieu, the head of the Conseil d'Analyse Economique, is calling for stimulus. Eric Woerth, the minister of the budget, still makes the case for long-term structural reform, yet even he seems to be scrambling to free up money for immediate stimulus, while remaining mindful of the limited room for maneuver owing to Europe-imposed deficit and debt limits. Christine Lagarde, meanwhile, evinces, publicly at least, a Micawber-like belief in the imminence of cost-free salvation: the worst of the crisis is over, she says, pointing to the recent decline in oil prices as a sign that the markets will stabilize themselves.

But is there any intellectual coherence to all this? James Galbraith, whose lament on the decline of Keynesianism I cited the other day, continues (in French) with a rather cheerful coda on the decline of monetarism, whose doom he believes the current financial crisis has sealed. No doubt there is a great deal of truth in this, but the failure of the Monetarist Revolution does not mean that a Keynesian Restoration is imminent. Too many weaknesses of the old regime were exposed in the interim to permit a return pure and simple to the way things were. Worse, current policymakers are left to fly blind, without instruments, in a conjuncture of pea soup. The disarray visible in France suggests that in such conditions, the once-anticipated "soft landing" is unlikely.

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