Tuesday, November 27, 2007

The Economic Consequences of Mr.Sarkozy (amv)

Frederic Sautet knows the way out of the French misery, that is, the escape route from the French preoccupation with incubating social conflict by hampering economic performance. In his view, "France needs the following changes:

  1. A tax reform that would dramatically reduce the marginal tax rates for everyone, especially that of the most productive income classes. So introducing a top marginal tax rate below 30% for example would be start, with the goal of reducing it over time towards 20% (and less). Taxation on corporation should be aligned with personal income taxation so as to make the tax system as “neutral” as possible. Many taxes should be removed such as the tax on wealth.
  2. A labor code reform to make it easier to hire and fire people. This would include reductions in payroll taxation.
  3. A reduction of the government involvement in business. This entails continuing privatizing government-owned corporations in domains such as energy, transport, etc. It also means introducing competition in domains where it has been limited or absent, such as education (it also means increasing competition in health and other areas where the government is a heavy player). Last, it means removing (or at least reducing) subsidies to all, including farmers, in order to create a level playing field.
  4. A reduction in the size and scope of government, which includes a reduction in the number of government employees. This is in order to achieve the goals of (a) reducing the burden of public spending in the French economy and (b) reducing the size of the public debt. At the end of the day, we have no example of high-growth countries with high public spending.
  5. Pension reform to allow young people to escape the fate of an inverted age pyramid."
I totally agree, yet the Grande Nation will surely not succeed to escape its statist mentality which is still so much alive and kicking. Not surprisingly, Sautet does not find much in the policies of Sorkozy which can boost economic performance:

"Instead of going after an extensive tax reform, Sarkozy has proposed a tax cap at 50%, the de-taxation of extra working hours, exemption for mortgage interest rates, and more loopholes for inheritance. All this is better than what exists today but is not what is needed. This will make a marginal difference but will not create the conditions for huge productivity and labor supply increases. Moreover, Sarkozy has shown that he is willing to continue the old Colbertist approach to industrial policy. When certain groups (such as fishermen or farmers) claim to be in difficulty, they continue to receive subsidies from the government. Sarkozy has reacted the way all presidents in the last 70 years have reacted in France.

Instead of dedicating his time and energy to the deep reforms that are urgent (because they would have the biggest effect on total factor productivity and because they would benefit the entire population), Sarkozy and his government have chosen to mend what is perceived as a social injustice: special pension regimes for some employees in the public sector. While it is clear that the special regimes are a problem, Sarkozy knew that there would be some opposition to any change (and granted the reaction from the unions was more than expected). By focusing his energy on a small part of the population (they represent perhaps half a million people), he opened the door to direct confrontation with people who see themselves as the victims of the reform process. Instead, the reforms must be wide, fast, and affect the largest number of people. This makes it harder for any group to resist them, and also can be seen as fairer. For instance, if a tax reform benefits everyone (rich and poor), then it is harder for anyone to claim that the government is only giving a present to its rich friends.

The result of the mess in the last three weeks is that Sarkozy has destroyed some important reform capital. While the majority of the population is against the strikes, it now believes that reforming is going to be more challenging than expected. It also makes people believe that all that is needed is to redress inequities in the pension system (and other related issues), rather than the deeper changes in tax and labor laws. All this is going to make the urgent reforms more difficult to carry out."
Allez les Bleus!