Monday, January 27, 2014

Economists at Daggers Drawn: Gourinchas and Martin Support Hollande's Responsibility Pact against Krugman

Pierre-Olivier Gourinchas and Philippe Martin claim that their calculations suggest that Hollande's cost-shifting from payrolls to the state budget will increase exports by 3% and raise aggregate demand by 0.75%. Hence the responsibility pact is not, as critics such as Paul Krugman (and I, in one of my moods) have charged, a contribution to austerity policy but rather a Keynesian policy in austerian drag (as I argued in a different mood).

Frankly, I don't know who's right. Gourinchas, Martin, and Krugman are all reputable economists, and I, at best a disreputable economist, don't even agree with myself. A lot depends on the details of timing, about which Gourinchas and Martin don't tell us much.


George Ross said...

Not only is timing a mystery, but also where the money will come from to offset the removal of employer contributions to family policy. Not much point in arguing with these economist guys, or, Art, with your different selves, until we know more. I am always a bit of a pessimist, but do the president and his creaking and groaning government themselves really know yet what they have actually pledged themselves to do?

Jeremiah Riemer said...

Whether this is an austerian duck or a Keynesian rabbit - sounds A BIT similar to how, at the very (pre-euro-crisis) start of the financial crisis, one could interpret Germany's response both ways. Good on this is the analysis of Steve Silvia ("Keynes in Lederhosen") about how to evaluate short-term wage subsidies:

Jeremiah Riemer said...

URL for Silvia on Germany 2009 (for some reason didn't stick to previous post):

Mitch Guthman said...

I'm still working my way through the article but one question I have is about the assumptions underlying the 3% growth in exports. Bearing in mind that I'm fluent in neither French nor economics, it seems to me that we are at the same impasse with the claimed boost to exports as we are with the claimed boost to employment. Essentially, businesses are being given a large pot of money and Gourinchas and Martin are making certain favorable assumptions about what will be done with that money. Specifically, I think they are assuming that exporters will use the cost-shifting savings to lower prices by the amount saved.

If the money is used rather altruistically to hire people to make stuff for which there is no demand (now and for the foreseeable future), then, yes, more people will have jobs and money to spend. Arguably very Keynesian indeed.

Similarly, if exporters use this free money to lower prices then this will have the functional effect of a currency devaluation and make French exports more competitive, even within the eurozone. Which would be good for the French economy.

Alternatively, as Art has previously observed, businesses could rightly say that there’s insufficient demand to justify hiring more workers and put the money in their pockets.

Just as they might reasonably conclude that it would be more profitable to put the money from Hollande’s cost-shifting in their pockets instead of lowering their prices. Which would be disastrous for the French economy in exactly the ways described by Krugman, et al, even as it would provide yet more stimulus for the economy of place de la Madeleine.

The entire affair reminds me of the large body of writing about the impossibility of of ever winning an argument with an economist if you let them make whatever assumptions they want.

Here, Gourinchas and Martin seem to be saying that if you give businesses a huge pot of free money and they spend it in a “Keynesian” way, then it will be stimulative to the economy. But it seems to me that all of this rests on businesses spending the money and not simply saving it.

I don’t see any basis for this assumption. None at all. Am I missing something in the article?:

Art Goldhammer said...

Mitch, I haven't seen their paper, but I assume the 3% figure is based on an estimated price elasticity of exports and the expected decrease in price of goods in the exported sector, which would not depend on increased spending by businesses. It's a different calculation from the one you allude to.

Mitch Guthman said...


I expressed myself in a somewhat confusing way. The “spending” I’m talking about is what the business will do with their savings. I haven't seen the paper either but I'm making the same assumptions as you, namely, that exporters will make their products more competitive by lowering their prices by the same amount as the benefit they will receive when Hollande shifts certain costs from the businesses to the state.

Consequently, the export growth foreseen by Gourinchas and Martin would seem to rest entirely on the assumption that business will uniformly choose to spur exports by lowering prices to mimic the effect on exports that would otherwise be better achieved through devaluation of France's currency. (There is also the related question of the wisdom of making one's product more competitive by lowering prices at the exact moment the IMF is warning about deflation, but that's best left for another day).

Again, because this cost shifting wasn't conditioned on businesses using their savings to hire more workers or lower their prices, there's no reason to suppose they will do either of those things in preference to buying bigger yachts for themselves. Indeed, there is every reason to suppose that's exactly what will happen. So, when this tax relief for business is paid for by cuts in social spending, the result will be another massive wealth transfer from the dwindling middle class to the rich.