Sarkozy The Supply-Sider

President Sarkozy new economic plan contains both good and bad news. The good news is that he wants to cut taxes by €11 billion per year, a much needed relief for the over-taxed French economy. The bad news is that he doesn't want to finance these cuts by spending cuts. Instead he wants to increase the deficit further. France already has a 2.5% of GDP government deficit-very high considering the current cyclical boom and Sarkozy's unfinanced tax cuts is likely to push the structural deficit even higher.

Sarkozy hopes this will increase growth, yet theoretical net effect of such a policy is ambiguous as the improvement in incentives from the tax cuts is counteracted by the "crowding out" effect of deficits as well as the income effect on work efforts. And as the theoretical effect is ambiguous, the likely actual net effect is likely to be small in either direction.

Combined with his attacks on the ECB for pursuing a "too tight" (i.e. insufficiently inflationary) monetary policy, a clear picture emerges of Sarkozy as a supply-sider. Supply-siders are basically Keynesians with their love for budget deficits and a "accommodative" (i.e. inflationary) monetary policy. Only unlike left-liberal Keynesians like Paul Krugman, they wishes to achieve the deficits by reducing taxes rather than increasing spending and they also generally use free market rhetoric and some free market policies (apart from tax cuts usually also deregulation and free trade). Sarkozy fits this description perfectly, although being a French politician he also uses some statist rhetoric and favors a certain degree of protectionism.

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