The French have elected Emmanuel Macron as their new President. He claims to be from the economic centre. But just what does this imply for his vision of how the French economy should be run? What policies is he likely to put in place? Can these policies rightly be described as ‘centrist’? In practice, some of his policies are advocated by the centre right and some by the centre left.
He wants to institute policies that are pro business and will have the effect of stimulating private investment, increasing productivity and resulting in faster economic growth.
His pro-business policies include: reducing corporation tax from its current 33.3% to 25%, the hope being that firms will invest the money that this will free up; reducing labour taxes on companies for employing low-wage workers; making the current 35-hour working week less rigid by giving firms greater ability to negotiate special arrangements with trade unions.
Other policies drawn from the centre right include reducing the size of the state. Currently, general government spending in France, at 56.5% of GDP, is the highest of the G7 countries. Italy’s is the next highest at 49.6%, followed by Germany at 44.3%, Canada at 40.8%, the UK at 39.4%, Japan at 36.8% and the USA at 35.2%. President Macron wants to reduce the figure for France to 52% over his five-year term. 
This will be achieved by cutting 120,000 public-sector jobs and reducing state spending by €60bn. He plans, thereby, to reduce the general government deficit from its 2016 level of 3.4% of GDP to 1% by 2022 and reduce the general government debt from 96.0% of GDP to 93.2% over the same period.
Drawing from centre-left policies he plans to increase public investment by €50bn, including €15bn on training, €15bn on green energy and €5bn each on transport, health, agriculture and the modernisation of public administration. But as this additional expenditure is less than the planned savings through greater efficiency and as GDP is projected to grow, this is still consistent with achieving a reduction in the general government deficit as a percentage of GDP. He has also pledged to extend welfare spending. This will include making the self-employed eligibile for unemployment benefits.
M Macron isalso strongly supportive of France’s membership of the EU and the euro. Nevertheless he wants the EU to be reformed to make it more efficient and achieve significant cost savings.
Articles
Macronomy: What are Emmanuel Macron’s economic plans? BBC News, Simon Atkinson (8/5/17)
Factbox: Emmanuel Macron’s presidential election policies Reuters, Brian Love (14/4/17)
What Analysts Are Saying About Macron’s Victory Bloomberg, Chris Anstey (8/5/14)
The Main Points of Emmanuel Macron’s Economic Programme NDTV, India (9/5/14)
Can Emmanuel Macron solve France’s economic riddle? The Guardian, Larry Elliott (30/4/17)
Why Emmanuel Macron’s bid to haul France out of its economic malaise will be harder than he thinks The Telegraph, Szu Ping Chan and Tim Wallace (30/4/17)
Macron’s policies on Europe, trade, immigration and defence Financial Times, Hannah Murphy (7/5/17)
French presidential election: Investors, economists and strategists react to Macron’s victory Independent, Josie Cox (8/5/17)
Questions
- Compare the performance of the French, German and UK economies over the past 10 years.
- Why does France have much lower levels of inequality and much higher productivity than the UK?
- How would (a) a neoliberal and (b) Keynesian economist explain the slow growth performance of France?
- Give some other examples of centre-right economic policies that could be pursued by a centrist government.
- Give some other examples of centre-left economic policies that could be pursued by a centrist government.
- How do M Macron’s policies differ from those of the (a) Conservative, (b) Labour and (c) Liberal Democrat parties in the manifestos for the 2017 General Election in the UK?
- What economic difficulties is M Macron likely to find in carrying out his policies?
- Would you describe M Macron’s macroeconomic policies as demand-side or supply -side policies? Explain.
- What specific economic policies does France want Germany to pursue?
Economists were generally in favour of the UK remaining in the EU and highly critical of the policy proposals of Donald Trump. And yet the UK voted to leave the EU and Donald Trump was elected.
People rejected the advice of most economists. Many blamed the failure of most economists to predict the 2007/8 financial crisis and to find solutions to the growing gulf between rich and poor, with the majority stuck on low incomes.
So to what extent are economists to blame for the rise in populism – a wave that could lead to electoral upsets in various European countries? The podcast below brings together economists and politicians from across the political spectrum. It is over an hour long and provides an in-depth discussion of many of the issues and the extent to which economists can provide answers.
Podcast
Should economists share the blame for populism? Guardian Politics Weekly podcast, Heather Stewart, joined by Andrew Lilico, Ann Pettifor, Jonathan Portes, Rachel Reeves and Vince Cable (23/2/17)
Questions
- Why has globalisation become a dirty word?
- Assess the arguments for and against an open policy towards immigration?
- In what positive ways may economists contribute to populism?
- Do economists concentrate too much on growth in GDP rather than on its distribution?
- Give some examples of ways in which various popular interpretations of economic phenomena may confuse correlation with causality.
- Why did the proportions of people who voted for and against Brexit differ considerably from one part of the country to another, from one age group to another and from one social group to another?
- In what ways have economists and the subject of economics contributed towards a growth in human welfare?
- What are the advantages and disadvantages of the trend for undergraduate economics curricula to become more mathematical (at least until relatively recently)?
Is too much expected of economists? When economic forecasts turn out to be wrong, as they often are, economists are criticised for having inaccurate or unrealistic models. But is this a fair criticism?
The following article by Richard Whittle from Manchester Metropolitan University looks at what economists can and cannot do. The article highlights two key problems for economic forecasting.
The first concerns human behaviour, which is influenced by a whole range of factors and can change very rapidly in response to changing circumstances. Moods of optimism or pessimism can quickly spread in response to a news item, such as measures announced by Donald Trump or latest data on growth or the housing market.
The second concerns the whole range of possible economic shocks. Such shocks, by their very nature, are hard to predict and can quickly make forecasts wrong. They could be a surprise election result, a surprise government policy change, a natural disaster, a war or a series of terrorist attacks. And these shocks, in turn, affect human behaviour. Consumption and investment may rise or fall as the events affect confidence and herd behaviour.
But is it a fair criticism of economics that it cannot foretell the future? Do economists, as the article says, throw up their hands and curse economics as a futile endeavour? Not surprisingly, the answer given is no! The author gives an analogy with medicine.
A doctor cannot definitely prevent illness, but can offer advice on prevention and hopefully offer a cure if you do get ill. This is the same for the work economists do.
Economists can offer advice on preventing crises or slowdowns but cannot definitively prevent them from happening. Economists can also offer robust advice on restoring growth, although when the advice is that the economy has grown too fast and should slow, it is often not welcomed by policy makers.
Helping understanding the various drivers in an economy and how humans are likely to respond to various incentives is a key part of what economists do. But making predictions with 100% certainty is asking too much of economists.
And just as medical professionals can predict that if you smoke, eat unhealthy food or take no exercise you are likely to be less healthy and die younger, but cannot say precisely when an individual will die, so too economists can predict that certain policy measures are likely to increase or decrease GDP or employment or inflation, but they cannot say precisely how much they will be affected.
As the article says, “the true value of the economist lies not in mystical fortune telling, but in achieving a better understanding of the nature of the economies in which we live and work.”
Article
How to be an economist in 2017 The Conversation, Richard Whittle (24/1/17)
Questions
- For what reasons has economics been ‘in crisis’? What is the solution to this crisis?
- Look at some macroeconomic forecasts for a country of your choice made two years ago for today (see, for example, forecasts made by the IMF, OECD or a central bank). How accurate were they? Explain any inaccuracies.
- To what extent is economic forecasting like weather forecasting?
- What is meant by cumulative causation? Give some examples. Why does cumulative causation make economic forecasting difficult?
- How is the increased usage of contactless card payments likely to affect spending patterns? Explain why.
- Why is it difficult to forecast the effects of Brexit?
- How can economic advisors help governments in designing policy?
- Why do people tend to overweight high probabilities and underweight low ones?
GDP is often used as a measure of wellbeing, even though it is really only a measure of the market value of a nation’s output or an indicator of economic activity. But although higher consumption can improve living standards, it is only one contributor to wellbeing, whether at individual or social level.
There are essentially four types of problems from using GDP as a measure of how society is doing.
The first is that it does not include (as negative figures) many external costs, such as pollution, stress and family breakdown related to work.
The second is that it includes things that are produced to counteract the adverse effects of increased production, such as security, antidepressants, therapy and clean-up activities.
The third is that it ignores things that are produced and do contribute to wellbeing and yet are not traded in the market. Examples include volunteer work, the ‘output’ of clubs and societies, work within the home, production from allotments and various activities taking place in the ‘underground economy’ to avoid taxation.
The fourth is the sustainability of economic growth. If we deplete natural resources, the growth of today may be at the cost of the wellbeing of future generations.
Then there is the question of the distribution of the benefits of production. Although GDP figures can be adjusted for distribution, crude GDP growth figures are not. If a few wealthy get a lot richer and the majority do not, or even get poorer, a growth in GDP will not signify a growth in wellbeing of the majority.
Then there is the question of the diminishing marginal utility of income. If an extra pound to a rich person gives less additional wellbeing than an extra pound to a poor person, then any given growth rate accompanied by an increase in inequality will contribute less to wellbeing than the same growth rate accompanied by a decrease in inequality.
The first article below criticises the use of crude indicators, such as the growth in GDP or stock market prices to signify wellbeing. It also looks at some alternative indicators that can capture some of the contributions to wellbeing missed by GDP figures.
Articles
Want to know how society’s doing? Forget GDP – try these alternatives The Guardian, Mark Rice-Oxley (27/1/17)
The Increasingly Inadequate Measurement Of Productivity The Market Mogul, Chris Woods (20/1/17)
Why GDP fails as a measure of well-being CBS News, Mark Thoma (27/1/16)
Limitations of GDP as Welfare Indicator The Sceptical Economist, zielonygrzyb (31/7/12)
Questions
- Should GDP be abandoned as an indicator?
- How could GDP be refined to capture more of the factors affecting wellbeing?
- Go through each of the indicators discussed in the first article above and consider their suitability as an indicator of wellbeing.
- “Everywhere you look, there are better benchmarks than these tired old financial yardsticks.” Identify three such indicators not considered in the first article and discuss their suitability as measures of economic performance.
- How might the benefit you gain from free apps be captured?
- Consider the suitability of these alternatives to GDP.
Economic forecasting came in for much criticism at the time of the financial crisis and credit crunch. Few economists had predicted the crisis and its consequences. Even Queen Elizabeth II, on a visit to the London School of Economics in November 2008, asked why economists had got it so wrong. Similar criticisms have emerged since the Brexit vote, with economic forecasters being accused of being excessively pessimistic about the outcome.
The accuracy of economic forecasts was one of the topics discussed by Andy Haldane, Chief Economist at the Bank of England. Speaking at the Institute for Government in London, he compared economic forecasting to weather forecasting (see section from 15’20” in the webcast):
“Remember that? Michael Fish getting up: ‘There’s no hurricane coming but it will be very windy in Spain.’ Very similar to the sort of reports central banks – naming no names – issued pre-crisis, ‘There is no hurricane coming but it might be very windy in the sub-prime sector.” (18’40”)
The problem with the standard economic models which were used for forecasting is that they were essentially equilibrium models which work reasonably well in ‘normal’ times. But when there is a large shock to the economic system, they work much less well. First, the shocks themselves are hard to predict. For example, the sub-prime crisis in 2007/8 was not foreseen by most economists.
Then there is the effect of the shocks. Large shocks are much harder to model as they can trigger strong reactions by consumers and firms, and governments too. These reactions are often hugely affected by sentiment. Bouts of pessimism or even panic can grip markets, as happened in late 2008 with the collapse of Lehman Brothers. Markets can tumble way beyond what would be expected by a calm adjustment to a shock.
It can work the other way too. Economists generally predicted that the Brexit vote would lead to a fall in GDP. However, despite a large depreciation of sterling, consumer sentiment held up better than was expected and the economy kept growing.
But is it fair to compare economic forecasting with weather forecasting? Weather forecasting is concerned with natural phenomena and only seeks to forecast with any accuracy a few days ahead. Economic forecasting, if used correctly, highlights the drivers of economic change, such as government policy or the Brexit vote, and their likely consequences, other things being equal. Given that economies are constantly being affected by economic shocks, including government or central bank actions, it is impossible to forecast the state of the macroeconomy with any accuracy.
This does not mean that forecasting is useless, as it can highlight the likely effects of policies and take into account the latest surveys of, say, consumer and business confidence. It can also give the most likely central forecast of the economy and the likely probabilities of variance from this central forecast. This is why many forecasts use ‘fan charts’: see, for example, Bank of England forecasts.
What economic forecasts cannot do is to predict the precise state of the economy in the future. However, they can be refined to take into account more realistic modelling, including the modelling of human behaviour, and more accurate data, including survey data. But, however refined they become, they can only ever give likely values for various economic variables or likely effects of policy measures.
Webcast
Andy Haldane in Conversation Institute for Government (5/1/17)
Articles
‘Michael Fish’ Comments From Andy Haldane Pounced Upon By Brexit Supporters Huffington Post, Chris York (6/1/17)
Crash was economists’ ‘Michael Fish’ moment, says Andy Haldane BBC News (6/1/17)
The Bank’s ‘Michael Fish’ moment BBC News, Kamal Ahmed (6/1/17)
Bank of England’s Haldane admits crisis in economic forecasting Financial Times, Chris Giles (6/1/17)
Chief economist of Bank of England admits errors in Brexit forecasting BBC News, Phillip Inman (5/1/17)
Economists have completely failed us. They’re no better than Mystic Meg The Guardian, Simon Jenkins (6/1/17)
Five things economists can do to regain trust The Guardian, Katie Allen and Phillip Inman (6/1/17)
Andy Haldane: Bank of England has not changed view on negative impact of Brexit Independent, Ben Chu (5/1/17)
Big data could help economists avoid any more embarrassing Michael Fish moments Independent, Hamish McRae (7/1/17)
Questions
- In what ways does economic forecasting differ from weather forecasting?
- How might economic forecasting be improved?
- To what extent were the warnings of the Bank of England made before the Brexit vote justified? Did such warnings take into account actions that the Bank of England was likely to take?
- How is the UK economy likely to perform over the coming months? What assumptions are you making here?
- Brexit hasn’t happened yet. Why is it extremely difficult to forecast today what the effects of actually leaving the EU will be on the UK economy once it has happened?
- If economic forecasting is difficult and often inaccurate, should it be abandoned?
- The Bank of England is forecasting that inflation will rise in the coming months. Discuss reasons why this forecast is likely to prove correct and reasons why it may prove incorrect.
- How could economic forecasters take the possibility of a Trump victory into account when making forecasts six months ago of the state of the global economy a year or two ahead?
- How might the use of big data transform economic forecasting?
The French have elected Emmanuel Macron as their new President. He claims to be from the economic centre. But just what does this imply for his vision of how the French economy should be run? What policies is he likely to put in place? Can these policies rightly be described as ‘centrist’? In practice, some of his policies are advocated by the centre right and some by the centre left.
This will be achieved by cutting 120,000 public-sector jobs and reducing state spending by €60bn. He plans, thereby, to reduce the general government deficit from its 2016 level of 3.4% of GDP to 1% by 2022 and reduce the general government debt from 96.0% of GDP to 93.2% over the same period.