Friday, 11 May 2012

Who doesn't want growth?

Francois Hollande, the new French president has promised to focus on growth instead of austerity. This sounds good, but what does it mean in reality? Where does growth come from? And why isn't the Eurozone growing?

Keynesian economists like Paul Krugman tell us that there is insufficient demand in the economy. Consumers aren't borrowing and spending as much as they used to in the good years. Think about this for a second - even a 5 year old can consume, surely the hard bit is to produce by organising Land, Labour and Capital in an efficient manner and delivering what the consumer wants to purchase?

The French, surely with their 35 hour working week, powerful Labour Unions, high levels of taxation and massive red tape aren't exactly on the side of people who want to produce or grow thier businesses. If Hollande thinks growth comes from increased public sector spending, he must realise that every penny the government spends must be taken from people who pay taxes or borrowed from someone else to spend now (thereby restricting the amount of Capital available for Corporations in France to grow and create jobs).

Deficit spending is a zero sum game - if the government borrows, it means there is less for the people and businesses to borrow, since there is only a finite amount of Capital available. If Hollande wants real and lasting growth, he must be willing to tackle the powerful Labour Unions in France and do what Thatcher did in the United Kingdom in the 80s. This will be unlikely since he is the "Socialist" candidate.

Sarkozy tried his best, but looks like the vested interests got the better of him. Good luck to Hollande though.


  1. I don't believe that the left are proposing no reduction in debt. The argument is that if you cut too fast then you cut off growth, which makes reducing the deficit significantly harder and sometimes sends it in reverse as a result of unemployment(increasing welfare bill) & reduced tax income. A slower rate of deficit reduction allows the economy to continue growing, keeping confidence high, business's filling the private sector cavity by providing jobs, reducing interest repayments, and easing the social re adjustment.

    1. Albion,

      The whole point of my post was where does growth come from?

      What % of GDP deficit are you willing to tolerate for what % of growth?

      The keynesian multiplier argument is deeply flawed. Government borrowing doesn't happen in a vaccum, it displaces existing Capital that would otherwise have been put to productive uses.

  2. The growth in many countries should already have met the bottle neck problem, which was caused by the Union and their welfare systems. There are many political risks for the European leaders to be determined to make a substantial improvement in the social systems e.g. Greece. Perhaps the only major real pushing hand behind the growth now is the development of Technology.

    The goverment should steadily cut the deficit and aim to bring back to a year "2000"ish economy. Dont get confused by a wrong target which was bubbled by Credit in the past decade.

    Once the economy and financial systems settle again in 4,5,6,7... years time, I think Europe should rely on Technology, Education and real industries to gain the leading position again.