Earlier this year, the photogenic liberal Emmanuel Macron became the bright young hope of the European Union. That was before self-inflicted policy failures caused a rapid collapse in his support.
Back in the Spring, pitted against the anti-Brussels, anti-globalist and—in its origins at least—pro-fascist National Front, Macron projected a progressive image for the EU after its treatment of Greece made it look more totalitarian than democratic.
But that was then. Since his election, Macron’s popularity has plunged faster than any French president in history. Attempts to explain this decline have focused on his pompous approach to governance—literally professing to want to govern like Jupiter. But there is a deeper cause. He has misdiagnosed the origins of the French economic malaise, and therefore his Jovian economic thunderbolts will do more harm than good.
It’s easy to show the blatant errors in the president’s perspective by merely looking at the data. Macron’s economic agenda cites an excessively large public sector as the fundamental cause of France’s malaise, and the main 'Evidence for the Prosecution' is the towering level of government debt: as of March 2017, this was 111 percent of GDP, almost twice the 60 percent of GDP maximum allowed by the Maastricht Treaty.
But private liabilities are worse still: 187 percent of GDP. So, why does Macron, in common with politicians of almost all stripes, not worry about this far higher level of debt?
The reason is that, given he was schooled in mainstream economics for his Master's degree at ENA (École Nationale d’administration), Macron accepts the argument that private debt doesn’t matter. It’s just a “pure redistribution”, to quote Ben Bernanke, which “absent implausibly large differences in marginal spending propensities” between savers and lenders, “should have no significant macroeconomic effects."
This comforting belief is sharply contradicted by the data for countries which, like France, have a private debt ratio well in excess of 100 percent of GDP. If Bernanke’s assumption were correct, there would be little or no correlation between credit (the annual change in private debt) and unemployment. However, in his home country of the USA, the relationship between credit and unemployment since 1990 is minus 0.91: meaning rising credit reduces unemployment, and falling credit increases it. In France’s case, the correlation is lower but still substantial at minus 0.62, when according to mainstream economics, it should be close to zero.
So credit matters, not merely because savers are much less likely to consume than debtors, but because bank credit creates new money. Since this new cash is spent by the borrowers, it adds to aggregate demand. And falling credit over time—which France has generally been experiencing since the early 1970s—therefore implies rising unemployment.
Of course, it’s not because wages are too high, but because a large component of aggregate demand is declining (even as France’s private debt level continued to rise). Here, the French pattern is very different to the US, where generally rising credit drove falling unemployment from the early 1990’s on.
As a result, France had appeared sclerotic on job creation while America, before the Great Recession, seemed to be dynamic. But they were both under the command of the same unsustainable trend.
Robbed of a monetary explanation for France’s malaise by a false model of money itself, Macron falls back on standard economic arguments which claim unemployment is high because wages are too generous, labor market flexibility is too low, and excessive government spending “crowds out” the private sector. His economic agenda emphasizes reforming France’s labor laws and reducing government expenditure to meet the Maastricht Treaty targets of government debt below 60 percent and the government deficit under 3 percent of GDP.
Macron’s labor market policies are based upon the standard 'supply and demand' argument where unemployment is caused by wages being too high. So he believes that if you remove the “rigidities,” demand for labor will rise as the artificially high price falls; and the “over-supply of labor” will also decline, according to conventional economics, as the artificially high wage is lowered.
This budget policy follows the Ordoliberal belief that 'fiscal discipline' improves conditions for commerce by keeping interest rate spreads low. Meanwhile, cuts to government spending of the order of €20 billion are being contemplated (close to 1 percent of France’s GDP), as are public sector job cuts and wage freezes.
These arguments, like Macron himself, are only superficially appealing.
If the price of some commodities is kept high by non-market interventions, then Economics-101 logic implies that removing these constraints should reduce the price, and cause both demand to rise and supply to fall, bringing the market back into equilibrium.
Similarly, if there is only so much money available, reducing the amount commandeered by the sclerotic government sector should make more of it available for the dynamic but currently constrained private sector.
However, as I explain in my book 'Debunking Economics,' there are problems with supply and demand analysis in general, let alone when applied to labor. But with labor, in particular, supply and analysis are entirely misleading.
For starters, even according to conventional theory, the supply of labor could rise if wages decline, thus increasing unemployment (because workers need to work more as wages plunge, to earn the income they need for consumption).
More importantly, the labor market is so integral to capitalism that it can’t be thought of using microeconomics alone: you also have to consider the macroeconomic impact of any change. Here a classic trap of the latter undermines not just what Macron thinks is good for the labor market, but what he believes is positive for government spending as well.
At the macroeconomic level, your spending necessarily becomes someone else’s income: the euro or dollars flowing out of your wallet, representing expenditure, flow into someone else's pocket as income. Also, especially since wages have fallen in real terms over recent years, workers spend the vast majority of what they earn—and even more than they bring-in when, as they are doing now, French households are borrowing from banks.
Cause and effect
Cutting wages will therefore also reduce GDP by almost as much, and possibly even more (as firms respond to a fall in household demand by investing less). That, in turn, will reduce the demand for labor—and not increase it as microeconomic theory argues. As a result, French workers could be put through the same pain that UK workers have experienced under Margaret Thatcher and Tony Blair, only to find that they face just as much unemployment as before.
The desire to reduce state debt by lowering government spending falls into a similar trap, which is that an attempt by anyone to save money through less spending works for them only by shrinking the incomes of others.
The logic is simple. Imagine some entity has an income of €200 billion per year, and spends the same so that its savings are zero. It decides to save €10 billion by spending €10 billion less, while still earning the same amount. That is possible, and it can result in that entity (let’s call it Sector A) saving €10 billion in that year, as planned.
However, since it has spent €10 billion less, it has reduced the income of other sectors by precisely as much: less spending by Sector A means lower incomes for other sectors in the economy. Now, if we split the economy into three sectors, then the income of the other two sectors (B and C) falls by precisely as much as Sector A saves. If they started at the same point—earning and spending €200 billion a year each—then the end result of Sector A saving €10 billion is that they each dis-save €5 billion. Aggregate savings remains at zero.
So income falls at the macro level when individuals (or an industrial sector, a big corporation, a government, even a nation in a trading bloc) attempt to save at the micro level. Macron’s government savings will reduce France’s GDP by just as much, and possibly lead to further falls if households and firms respond by also trying to reduce their debts.
Thus, Macron’s unpopularity is not just because of his bombastic approach to governance. It is also because French voters have always been suspicious of the neoliberal agenda he represents, and they only need to look across The Channel to see what these policies portend for both industry (halved relative to GDP since Maggie Thatcher’s day) and working-class living standards.
Macron will doubtless blame obstructionist bureaucrats and militant workers for the failure of his program when his day as electoral fodder arrives in 2022. We had better hope that some non-neoliberal alternative arises to the National Front before then.
Steve Keen is an Australian economist and author. He’s professor and Head of the School of Economics, History and Politics at Kingston University in London.