Avoiding France’s mistake

While cheering for capitalism, Congress is careening down the same path that led to the election of a socialist president in France.
America shares with France two problems: a struggling economy marked by high unemployment and an increasing national debt. France dealt with the problems in a way that led to a popular rejection of capitalism. The U.S. House is mimicking the French strategy.
Much of America’s increased national debt is the result of a revenue shortfall caused by a recession-triggered decrease in consumer demand.
The opposing theories on how best to deal with the intertwined problems of lethargic demand and excessive debt are austerity and stimulus.
The austerity strategy works on the assumption that the growing national debt is a cause of the economic problem, rather than a symptom. Reducing the debt by increasing taxes on the wealthy is a mistake, under this theory, because such taxes are a disincentive to prospective investors who are already jittery about national solvency. The only solution, under the austerity theory, is to cut expenses.
France pursued the austerity approach under outgoing President Nicolas Sarcozy. It did not work. Austerity measures, by definition, decrease demand. Job creators may be concerned about France’s national debt, but it turns out they are more concerned by a lack of demand. Capitalists do not hire people because they approve of the national balance sheet; they do so because there is demand for their products.
England, Spain and other countries that tried austerity are having similar results.
In a recession, the drop in consumer demand leads to a drop in production and resulting layoffs. The layoffs, of course, push consumer demand even lower. This was the downward spiral that began sucking the life out of the U.S. economy in late 2007.
The idea behind a stimulus strategy is to reverse the spiral. There is no good way to increase consumer demand directly, so the government — using borrowed money — increases public sector demand. The critical task of debt reduction must come after the private sector recovers.
The United States — politically torn between austerity and stimulus — fell somewhere in the middle. The federal government increased its expenditures enough to counteract cuts by state and local governments, but not enough to replace the drop in consumer demand. So today we are better off than austerity-crippled France, but we continue to struggle with 8 percent unemployment, anemic economic growth and suppressed tax revenue.
The budget recently passed by the U.S. House — drafted by Rep. Paul Ryan, R-Wis. — adopts the austerity approach. Like Sarcozy, Ryan and his colleagues would slash expenditures that benefit the poor while reducing taxes on the wealthy.
Austerity is an economic mistake.
Moreover, as Sarcozy discovered, it is political suicide. Employing a strategy that hurts the masses while benefiting the wealthy — all while increasing the deficit — results in political rebellion. And that’s what France got, in the form of the election of socialist Francois Hollande.
Hollande is an actual socialist. President Barack Obama — despite the casual epithets hurled at him from the right — is not a socialist. He does not believe that the government should own the means of production. To be sure, he supports a more active governmental role in the economy than do House Republicans. He proposes tackling the deficit with increased taxes on the wealthy, although at a lower tax rate than has been common in the past. He opposes wholesale cuts in the welfare system and rejects austerity as a solution to depressed consumer demand.
In short, Obama’s economic prescription is one designed to impose as little misery as possible on the masses.
Believers in capitalism should support his efforts. The majority of Americans have almost no ability to accumulate capital and thus are powerless in our economic system. They have immense potential power, however, in our political system.
The lesson of France is that capitalism depends on popular support.
Ryan, like Sarcozy, has adopted an austerity approach that — if implemented — eventually will cost him his job.
That Ryan eventually will succumb to a public backlash is no big deal. It would be a big deal, however, if capitalism goes down with him.
Obama is not the antithesis of capitalism in these troubled economic times, but its best chance for continued public acceptance.
Contact Eric Fleischauer at http://www.mile304.com or eric@decaturdaily.com.

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Filed under Class warfare, Socialism, stimulus

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