When did France become a non-employment society?

As of 2015, the general stereotype that the French are somewhat lazy and work little is well established worldwide. Indeed, on this site, I have repeatedly commented on the “non-employment society”, the 35 hour week, etc. For some economists, this is the natural result of regulations and of the very high tax rate on labor which prevails in the country. For others, it is at least in part due to French preferences for working less (although why a preference should be embodied in a regulation remains a mystery to me).

While I do believe that taxes have an important effect, I also always thought that if you deregulate the labor market and reduce taxes down to reasonable levels, the French would still work substantially less than Americans.

So here is a little quiz that may help shed light on this question: what is the average number of hours worked per employed in France in 1950, and in the US?

The answer can be gotten off the shelf from the Penn World Table, and it comes as a big surprise: in 1950, a French employee was working 2158 hours per year, and his american counterpart was working 1900 hours per year on average! Furthermore, the employment/population ratio in the U.S. was 40 %, while it was equal to 46 % in France. The non-employment society, then, if anything, was the US, not France.

In 2011, the French was working 1475 hours a year, and his American counterpart 1700 hours. The French employment/population ratio was down to 41 %, the American one had gone up to 45 %. And this cannot be due to differences in female participation rates, they are virtually identical between the two countries at close to 69 % in 2011.

As a result, French society was providing 1000 hours of work per person in 1950, and it is down to 600. In the US, there were 760 hours of work per person in 1950, and in 2011 it is slightly up to 771.

When did French workers start working less in a given year than American ones? You cannot make this up: In 1982, 1 year after the first socialist/communist coalition came into power.

Therefore, there is no inherent French preference for working less. Rather, skilled politicians managed to put together coalitions of people who increasingly lived off (and therefore supported) a zero sum redistributive game. As a response to that, the population gradually learned to refrain from wealth creation. Perhaps it may become a second nature after a while, but let us not be too pessimistic.

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Some unpleasant fiscal arithmetics

One frequently hears in France that our tax system should be more progressive, because it is supposedlynot progressive enough. Indeed many proposals and actual policy measures go in this direction, like payroll tax cuts on low-wage earners, capping some family benefits, the 75 % tax on high wage earners, or introducing progressivity in an additional tax invented a few decades ago and called CSG. Yet as long as a serious effort is not made to reduce the size and scope of the government, these reforms are bound to crash, for a very simple reason: The highest the average tax rate, the smaller the scope for progressivity. The reason is simple: in such a situation, cutting taxes on the poor can only be matched by near confiscatory taxation on the rich. These people will likely exit the country (as did Gerard Depardieu and Mathieu Valbuena), or severely reduce their labor supply (as many medical doctors do). The economy will suffer large distortions and in the long run will probably end up on the wrong side of the Laffer curve for the tax receipts coming from the rich. Suppose the government wants the bottom 20 % of the distribution to pay no taxes, the next 60 % to pay an average tax rate, and the top 20 % to make up for the rest. With an average tax rate of 40 %, the top 20 % need to pay an amount equal to 12 % of aggregate income, i.e. an average tax rate of 60 %. But when the average tax rate is 50 % (as in France, although the long-term figure should be even higher), the middle class pays 0.6*50 = 30 % of national income, and we need the top 20 % to pay an average tax rate of 100 %. If we now remember that we cannot have such jumps in the tax schedule and that there will be large distortions, we see that the scope for progressivity is quite small. When the government confiscates 50 % of more of national income, pretending to implement a highly progressive tax schedule is simply a lie. Everybody has to contribute a big deal. This is why each time money was really needed, governments resorted to broad-based measures like the introduction of CSG, raises in payroll taxes, VAT, or corporate taxation (without mentioning the clearly regressive gasoline tax which has the merit of having a broad and inelastic tax  base). How about making the expenditure side more redistributive, for example by capping pensions, excluding people above a certain income level from access to public hospitals, privatizing theatres, operas and museums, and introducing tuition fees in higher education? After a while people will integrate those restrictions in their economic calculations and they will likely result in huge economic distortions as the implicit marginal tax rate associated with losing those benefits is very high.

Running out of other people’s money

There is much agitation in France concerning a number of cost-cutting measures the government is trying to implement in order to comply with the budgetary targets associated with our European commitments. Especially notable are the increase in a tax on pensions and the reform of maternity leave, whereby one is moving from a system where mothers can have up to 36 months of maternity leave, to a system where each parent has 18 months.

It is generally thought that this new system will, under a pretense of “gender equality” actually reduce spending, because most fathers will not take advantage of their eighteen months, while mothers will be compelled to halve their leave relative to the preceding system. It is also believed that the system will increase congestion in publicly-funded daycare centers, unless more slots are created there, which, as day-care centers cost more than 1000 euros per month per child, will wipe out any savings from the shorter maternity leave.

Angry middle class mothers contemplate being forced to separate themselves from their babies at a very early age, and, to add insult to injury, also being forced to fight against competitors for those coveted and rationed day care slots. Resentment builds up in anticipation of the suspicions of corruption, favoritism, and political and ethnic bias in the future allocation of this increasingly congested socialized resource. Ms Le Pen cannot believe her luck and is celebrating.

Generous maternity leave was implemented a couple of decades ago as a joint venture between “Santa Claus socialism” and “old-style feminism”. Old-style feminism recognizes that women are different from men, and concludes that taxpayers’ money should be used in order to promote the formers’  “work-life” balance. In the society that prevailed before the rise of the welfare state, women’s maternity leave was funded by their husbands; this was regarded as a form of exploitation. In order to free women, “society” had to pay for maternity leave. This meant that taxes had to be increased and consent withdrawn from the workers who had to finance those benefits regardless of their own personal choices and marital status. As for Santa Claus, his agenda was to collect votes from naive people by promising them freebies. Who could say no to 20 to 40 years of holidays (aka pensions) or to the dream of taking care of one’s kid at home while being paid an “allocation” and having her job kept warm at the office?

The problem was that as Santa Claus was pounding the population with benefits and entitlements,  costs inevitably soared, while the economy was nearing asphyxia under the burden of taxes and regulations. As people were more and more encouraged to participate in the zero-sum game of claiming benefits, and more and more discouraged to participate in the positive-sum game of voluntary exchange, the cake began to shrink. Santa Claus started realizing that the size of the cake was not sufficient to fulfill each kid’s Christmas list. Some of the children had to be reluctantly informed that there is no Santa Claus.

This is all the more painful than the poor people, after decades of being spoon-fed, can no longer take care of themselves. For one thing, they lost the habit; they cannot conceive that now that the government says they should stop work for eighteen months instead of thirty-six, they might remotely consider disobeying. But we can hardly blame them. The evil husband is no longer in a position to provide for his wife’s maternity leave. Half of his earnings are confiscated before they even land on his bank account, in order to fund, among other things, other people’s parental leave. The woman that the government has freed from the patriarchy has no other choice than organizing her life according to the government’s prescription, which means that the baby will stay with his mother for eighteen months, no more. Enjoy your freedom from the patriarchy!  Unless, of course, the family has enough money left, despite the heavy taxation…

So, in this society obsessed with egalitarianism and the fight against the “reproduction of elites”, we will observe that the children of the lower middle classes will be abducted from their homes at the age of eighteen months, to be taken care of by bureaucrats; at the same time, the children of the upper middle classes (among whom, conveniently, the apparatchiks who impose the Theory) will enjoy the benefits of staying with their mothers, or selected nannies, for much longer. Meanwhile, the boundary between those two social classes moves up, due to the swelling of the Tax Moloch.

Nobody in the establishment, though, will pay attention to that.

For one thing, the establishment is convinced that “professional” public servants do a better job at taking care of children than their mothers. I remember participating in a meeting of officials very concerned about “equality”, and they were brain storming about how to design schemes so as to prevent kids from the lower classes from spending school holidays with their family ( a number of representatives from NGOs which supposedly cared much about families, were nodding in approval). Their general prejudice was that kids from “privileged” families were spending those holidays taking intensive math and language lessons, while those from “disadvantaged” families were at best watching TV.  There was no mentioning of the inherent contradiction between subsidizing fertility at the lower end of the skill distribution and devoting public resources to separate the offspring of those subsidies from their “disadvantaged” environment.

But, more importantly, the Theory has changed. Old-style feminists have been replaced by Gender feminists. Now there is no difference whatsoever between women and men. In fact, there is no longer any presumption that the two parents should be of opposite sexes (actually those parents do not even have a sex, only an ectoplasmic “gender identity”). There is no longer a mother and a father, only a parent 1 and a parent 2. Surely, then, it would be unfair if parent 1 had a different parental leave from parent 2? So why don’t the people just obey and combine eighteen months of parent 1’s with another eighteen month of parent 2’s parental leave? Why does it matter to them? Don’t they know the Theory says it does not?

Now you may object that since — according to the Theory itself — parent 1 and parent 2 are interchangeable, one day of parental leave by parent 1 is interchangeable with one day of parental leave by parent 2. Therefore, why not give a total of 36 months to both parents, and let these two people decide on how to split it between themselves? Remember they are free. What does free mean? Or maybe “free” in “free from the patriarchy” has  a specific, unusual meaning, as in, say, “freedom is slavery“?

Now I am not familiar enough with the apparatchiks who apply the Theory to figure out why this obvious remark has escaped them. But I suspect they believe that Parent 1 and Parent 2, if left free to choose, would decide that the parent with the least stable and/or least paying job would take the maternity, sorry, parental leave.

This has two big drawbacks. First, it is what people want. Second, it is efficient. A Theory which would let that happen would be useless — it would make no difference if the Theory was not around. A Theory which makes a difference is one which compels people to do what they do not want.

The Theory is especially useful when the cake shrinks. It tells you who should have their piece, and who should be denied a piece. Households who prove the theory should have their piece. Households who disprove the theory should have nothing. Households who apply the theory will have 36 months of parental leave. Households who do not will just have 18 months.

You do not know how much you should bend human nature for the Theory to be true.  Lyssenko found out that he could not bend the nature of wheat by enough for his theory to be true. Others died. Our Theory is much more humane than Lyssenko’s; we just impose a little tax on those who do not conform to it. They are welcome to pay it and contribute to the consolidation of public finances; they are also welcome to dutifully take turns in child care between Parent 1 and Parent 2 and show that the Theory works.

 

 

 

On the art of clientelism

Besides the train strike (which is basically over), there is another protest movement by the so-called “intermittents du spectacle” (henceforth “intermittents”). These are employees of the cultural/media industry who enjoy a specific unemployment benefit system. Essentially this system allows them to move back and forth between temporary employment and unemployment benefits, while other temporary workers (say in the tourism industry) would have to spend a larger fraction of their time in employment in any given year to be eligible for benefits. Beyond the eligibility rules, being on benefits has become a way of life for the intermittents. As a result, their specific unemployment benefit system has an annual deficit of about 1 billion euros, which is about the same, for 250.000 contributors, as that of the general system, which covers 16 million people. This is a transfer from the rest of society (including poorer people and people who have far less enjoyable jobs) to the intermittents.

As a result, the social partners, who are supposed to negotiate the financing of the welfare state, have regularly tried to cut on these conditions. In general there has been enough consensus between unions and employers on these reforms, because the intermittents are perceived by regular working class employees as privileged, while employers want to cut on labor costs and social security contributions. Thus the main private sector labor union, CFDT, has generally gone along with the employers’ proposals to cut the benefits. By contrast, the CGT labor union which represents mostly public sector employees is opposed to the cuts, and is active in organizing the intermittents. This is rational: While the CFDT median voter has to finance the intermittents scheme by paying higher contributions to the unemployment benefit system, public sector workers have job security and therefore do not contribute to the system.
In 2003 a reform was implemented and met by protests that perturbed a number of summer cultural festivals, up to the point that a sacred cow of French cultural mythology, the Avignon theater festival, had to be cancelled.

The same scenario is being played out right now as another agreement by the social partners has managed to put some mild cuts into place for the intermittents’ specific system. The movements should be less popular than ever, given the punitive tax increases that have been inflicted on most of the population since 2011. Nevertheless the Valls government has already yielded to the intermittents by transferring part of the costs to the tax payer; the agreements between the social partners is, then, purely cosmetic. The financing of the system is being put into the general government budget instead of the “social accounts”.

[Quite remarkably, exactly the same trick was played after the 2003 reforms. But you have to read the austere report of the “Cour des Comptes” (a committee of Cassandrae who open closets and lift carpets, then write reports on what they have found, and whose wise recommendations are invariably ignored by the politicians) to figure out how. The 2003 reform made eligibility rules stricter. But a special fund, financed out of the government budget, was put in place to guarantee a smooth landing for those who were no longer eligible. The fund was supposed to be temporary (like the jobs of the intermittents), but never trust a temporary measure.]

The existence of the intermittents is a remarkable example of political clientelism. Over the years, the eligible population has been multiplied by 10. This reflects the explosion of “cultural” spending by successive governments. Short-time unemployment compensation is a way of life for most people involved in “spectacle vivant” (theater, dance, clowns, happenings) and is also used by television and radio channels, including the State-owned ones, to pay their technicians.

The rise in the number of people working in the “cultural” sector, maintained by subsidies at an artificially large size, is a way for the political left to recruit its own electorate. The intermittents are a captive electorate, because the excess size of the entertainment sector puts them constantly under theat. They know that a substantial fraction of them would have to relocate to other industries (and lose part of their human capital) should the subsidies be cut. They also know that employers, and more generally union representatives for private sector employees, have targeted the intermittents benefit scheme as a priority for implementing cuts in social spending. This means that the threat they face is associated with the political right, implying that they need the left to be in power so as to protect their rents.

Distributing rents is not sufficient for successful clientelism. If the beneficiaries of the rents think that the opposite political party will treat them just as well, they have little incentives to reward your clientelism with votes. The rent must therefore be designed in such a way that your political opponents will try to eliminate it. By having the intermittents UB scheme being financed out of the UB system instead of the general budget, one makes the cost to other workers more apparent. That is, as you create the rent, you create a constituency against that rent at the same time. And that constituency is important in convincing your clientele that your opponents will attempt to eliminate their rent. The price to be paid for it is that the scheme will come regularly under attack; but these attacks secure loyalty among your supporters.

While the rent has to be fragile, it has to be resilient at the same time. You will need your clientele as an army to reconquer power if your opponents win the next election. But this army will not be around should the next government eliminate the scheme by a stroke of pen. To prevent that, make sure that the rent is not a discretionary subsidy scheme. Instead, it should be embodied in some form of entitlement.

The clientelism scheme will also work better if you can recruit more people into it. This means that the rent should be relatively small, so as to save resources for raising the number of beneficiaries. And if your clientele is an occupation or an economic sector, entry into it should be relatively easy (of course entry cannot be costless because that would simply eliminate the rent). Indeed many of intermittents are relatively mediocre artists who would have elected a different occupation in the absence of the scheme. Lowering standards and promoting amateurism goes hand in hand with the ability to enroll many people. Conversely, one would not go very far politically by promoting “excellence” in the arts instead.

Finally, make sure to “leverage” your clientelism by designing it so as to enroll indirect supporters in addition to direct ones. Suppose you are the mayor of a small city; you get more support by giving municipal jobs to members of large families than small families. By hiring one employee, you not only make him happy, but also his parents, sister, cousins, and so forth. In that respect, targeting the entertainment industry is a clever idea, since they can potentially enroll the audience. By targeting artists and intellectuals for your clientelism, you also achieve leverage. By virtue of their profession, these people influence public perceptions; and a dog does not bite the hands that feed him. Indeed each election a cohort of artists and intellectuals duly endorse the left in the media, while the right has to content themselves with a handful of athletes, movie stars and popular singers (who in fact reach out to far more people than the artists and intellectuals, but the point here is that many of the latter benefit from government subsidies).

I can only speculate about why over the years the right-wing governments have proven impotent in reducing the size of a scheme which, in addition to being considered unfair by many people, runs against them politically. Perhaps an explanation is that the educated bourgeoisie, who consume a substantial amount of “elite” cultural products, does not want their music and theater festivals to be sabotaged. This is a form of hostage taking but the hostages seem to be struck by some sort of Stockholm syndrome, perhaps rationally so. They contribute more to the system than they get, but as consumers of cultural products they do get part of their taxes back in the form of low prices and an abundant supply. They expect to lose more from a less profligate and more expensive cultural sector than they would gain from reduced social security contributions if the cuts were to be implemented.

Why are French trains on strike this time?

The main Marxist unions are going on strike as a protest against the merger between “Réseau Ferré Français”, the rail operator, and “SNCF”, the train operator. I was not aware of this merger plan, for the simple reason I did not think it would even be possible. The rail operator had been split from the train operator, following guidelines from the European Union, to introduce competition in train services. While the infrastructure per se is considered a natural monopoly, the business of operating trains is not, and therefore the European Commission has tried to introduce competition there, as was done long ago in the U.K.
Indeed, private operators have been allowed in the freight business (the SNCF market share in that sector is around 85 %), but no government has dared to confront the unions by introducing competition in the passenger business. As a result, SNCF has been able to reap substantial rents. According to a report, the price of a train ticket has been rising twice faster than inflation between 2002 and 2009. The celebrated TGV often costs almost as much as an Air France ticket on the same route. In a country obsessed with sustainable development, travelling by car is generally more economical than using the train.[1]
The monopoly power of SNCF (and therefore its unions) is supported not only by restrictions on intramodal competition, but also on intermodal competition. It is illegal to operate a bus route between two places that are served by SNCF. A famous trick to go from Paris to Strasbourg by bus consists in purchasing a Paris/Warsaw bus ticket and ask the driver to drop you while passing through Strasbourg. And of course the Paris/Warsaw bus ticket is cheaper than the Paris/Strasbourg train ticket.
While the French governments’ going along with the Brussels deregulation plans has always been mostly cosmetic, I would not have thought that it could openly go backwards and engineer a merger between the network operator and the national train company. Any future operator who believes it could compete fairly with a publicly funded rival which has captured the network operator has to be a fool (similar considerations explain why Air France has a 96 % market share on domestic flights).
The European Commission does not plan to remain idle in response to this insult, but how many divisions does it have?
Why do those unions oppose the merger? It should make it easier for them to preserve their rents in the long term. It is in particular making sure that any private operator will be bound by the same collective agreements regarding wages and working conditions as SNCF. But the unions fear that the merger could make SNCF more efficient, which would of course destroy some jobs and even allow management to keep labor costs down. So the unions are not against the merger per se but they would have liked further provisions to make sure productivity cannot go up. For example they asked for a plan to “re-humanize” train stations, i.e. replacing ticket vending machines by people, although they are probably content with keeping the machines while having those people sitting idle at some information booth instead of selling tickets.
In any case, it is hard to believe that these fears are sincere. Mergers lead to efficiency gains only in a reasonably competitive environment. As long as the system is rigged to maintain a very high market share for SNCF, the conglomerate will prefer to buy social peace, knowing the taxpayer will eventually foot the bill. In particular, the reform has a provision to involve the regional governments in the management of SNCF. These regional governments generally insist to maintain lines that have very few customers but that they deem essential for “territorial development”. This provision is making it less likely that SNCF will shut those politically sensitive, but inefficient train lines.
It is more likely that the strike is part of the general offensive against the Valls government, which is highly suspected by left-wingers of being a “social-liberal” modernist one, economically aligned with Brussels. Indeed the same unions are also organizing taxi drivers and temporary workers in the cultural industry (who have a specific unemployment benefit regime). Their nightmare is to have to deal with a French variant of Felipe Gonzalez, a deregulating, privatizing and tax-cutting socialist. And where would such a hybrid individual be born, if not slightly south of the Pyrénées?

Note:
[1] There are, however, other explanations for the drift in ticket prices. One is that ticket prices were initially too low, for political reasons; they ended up being high because at the end of the day rail transport is not a very efficient technology. The other is that ticket prices simply reflect the upward trend in the fees charged by RFF to SNCF for using its network. This may sound incredible: how can a publicly owned operator charge a markup to its public client, despite that its mandate should be to keep prices close to marginal costs and that double marginalization is highly inefficient? The answer, I believe, lies with the under-researched issue of government schizophrenia. The bureaucrats in charge of RFF do not internalize the wider social welfare or even the wider government budget constraint; some government representative on the board considers it as his job to raise the profits of RFF, independently of the net effect of RFF’s pricing policy on the economy and the general government budget.

The political economy of the Breton upheaval. II: A symptom of collective mad cow disease.

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I will continue my discussion of the Breton upheaval by discussing its economic, or rather mad-cow-nomic, roots.

Over the last two decades French public opinion has become increasingly vocal against globalization. All political parties have to some extent a protectionist stance, if only a nominal one. The “extreme” parties are outright protectionists. The ruling parties’ platforms include a cosmetic industrial policy agenda to make-up for the fact that they will abide by international treaties and therefore are in no position to close frontiers.

The arguments of the opponents to globalization are simple. How can a French firm with high labor costs compete with a Romanian firm with low labor costs? The French firm will have to close and its employees will be out of jobs. If globalization puts people out of jobs, why does the European Union write reports saying it is good for the economy? And why is it imposed upon the French people, increasingly against their consent?

At the same time, there is much less support for protectionism in other countries with similar levels of developments, such as the U.S., the U.K., Sweden or Germany. These countries seem to adapt better to globalization, in fact they are more globalized than France; the Bolkestein directive has been implemented to a greater extent in the UK and then Germany than in France, and yet their population is more sympathetic to trade. Indeed, in Germany the unemployment rate has constantly fallen throughout “the worst crisis since the great depression” and is now at a minute 5 %. (According to a French magazine, this is “the example not to be followed”.)

We could believe that the French are brainwashed, and that may be true to some extent, but facts seem to confirm their views. Every day a prominent firm announces that it will close or downsize, and the Breton food and agricultural industry is one of the most exposed ones. Could it be that globalization is good for Germany and bad for France? And what differences between these economies could account for that?

To answer those questions, we need to understand why wages are low in Romania in the first place. And we need to understand why we may gain from trading with them despite that some firms can’t compete with their low wage producers.

Suppose we only trade with countries with a similar level of development. Then, clearly, no firm would have to shut down because its foreign competitors have lower costs. Consumers would gain not because they would import cheaper products, but only because they would consume a broader range of products. Yet even in such a situation, some firms would have to close, because they are less productive than their German competitors; and some German firms would have to close, because they are less productive than their French competitors. This should be no problem; because France and Germany have a comparable distribution of skills, trading between them does not impact the distribution of wages. So if lose my job because some German firms are more efficient than my employer, I can expect to find another job at a similar wage elsewhere. In fact, reallocating resources to the most productive competitors increases the productive capacity of both economies and makes everybody better-off.

Yet if you describe this scenario to a French, he will object that once he has lost his job, he won’t find another one. The scenario only works if the economy is sufficiently flexible to smoothly reallocate labor between firms. And that is not the case of the French economy.

Suppose now that instead of trading with Germany, we trade with Romania. These people earn much lower wages. Yet that must be for a reason. If they were as productive as the French in all sectors, they would have the same real wage and real living standards. Any differences in nominal wages would then just be a matter of exchange rate misalignment. The Romanians must therefore be less productive than the French. But if they were uniformly less productive than the French, they would not be able to undermine the competitiveness of French firms. A French firm which pays 100 to workers who produce 100, can sell its good at the same price as a Romanian firm which pays 50 to workers who produce 50.

The problem comes from the fact that the Romanians are not uniformly less productive. They may be far less productive at making airplanes, but equally productive at producing poultry. They only earn 50 because of their low productivity at making airplanes, but their poultry firms pay 50 to their workers who produce 100, while the similar French competitor has to pay 100 and needs to sell its production at twice the price. When forced to compete with the Romanian firm, the French firm has to close unless its own wages fall down to 50. If that happens, its workers will become much more attractive to hire for the aircraft industry and will relocate there. The aircraft industry will grow and indeed it would attract all the former workers of the poultry industry if workers were identical. Given that the aircraft industry does not suffer from competition from Romania, eventually no worker has suffered a wage loss and people are better-off because they can consume cheaper Romanian chicken that is financed by exporting aircrafts. But perhaps workers in the poultry industry are not so productive in the aircraft industry because they are  “unskilled”, and through trade they have to indirectly compete with Romanian unskilled workers who are relatively more abundant. Then the unskilled workers end up with lower wages, but their wage losses are smaller, the better their ability to relocate.

Then, you might ask, why would the unskilled accept trade with Romania if their wages fall? The answer is: they wouldn’t! But in theory we may design the shift to globalization in such a way that they are compensated for the wage losses. We could levy a tax on the consumers, who benefit from cheaper imports, and finance a transfer to the unskilled, who also benefit from cheaper imports but not enough for this to offset the effect of their wage losses, in such a way that everybody is better-off. This is because free trade generates global net gains at the aggregate level.

Of course, one does not have to do it. It is written nowhere that the losers from public policies have to be compensated. In fact most public policies are zero-sum (or even negative-sum) redistributive ones such that compensating the losers is impossible because the policy does not generate any gains. Its legitimacy comes from “consent” of at least a majority of voters. But, as we have seen, that kind of “consent” has been denied to the French in the case of the Eastern enlargement of the European union.

But the central issue is that the French economy does not work as described. In fact it has been designed in such a way that participation in a free-trade zone with low wage countries has catastrophic consequences.

On the one hand, market rigidities make the adjustment to foreign competition more painful, and magnify the losses for the social groups exposed to it. Workers who can no longer compete with their Romanian counterparts have to lose their jobs, because minimum wages and collective agreements make it impossible for them to have a wage cut. Regulation makes it harder for them to relocate to another industry or location. For example, they would have to buy a costly license should they want to become a taxi driver, or to spend years getting a degree should they want to open a hair salon. They would lose their order of priority in access to social housing should they want to accept a job elsewhere.

On the other hand, participating in a global market increase the economic distortions associated with taxes and regulations. For example, in a closed economy, an increase in social minima would make unskilled labor more expensive to hire, and firms that employ lots of unskilled workers could adjust by raising prices. This would generate some employment losses and welfare losses for consumers. But these losses would be smaller than in an open economy, where those firms could no longer raise prices, since their customers would then shift to foreign competitors. Instead they would have to close and their workers would become unemployed.

Many other handicaps compound those issues, such as the working time regulation, the gradual piling up of safety and environmental regulations, the ever crawling up payroll taxes, and the Euro.

With a rigid economy, losers lose more, and gainers gain less, from globalization. It is no longer obvious that there are aggregate gains from trade. To compensate the losers one needs a greater tax hike than in a flexible economy, and it may be impossible for everybody to gain.

The  inherent contradiction in French economic policy is to insist on implementing ideologies that hamper markets, while at the same time participating in globalization, which makes flexible markets more necessary. French politicians live under the delusion that they can survive that contradiction by making it up with subsidies. Last week only the government spent 5 billion Euros of taxpayer money to appease interest groups, including the angry Bretons. They hope that they can find some more malleable people willing to remain silent while they have to pay more taxes to finance the subsidies that the more vocal, connected, or violent groups managed to get for themselves.

Suggested reading: Saint-Paul, Gilles (2007) Making Sense of Bolkestein-Bashing: Trade Liberalization under Segmented Labor Markets.Journal of International Economics, 73 (1). pp. 152-174.

Suggested movie: Que la fête commence, by Bertrand Tavernier, with French actor jean-Pierre Marielle at his best in the role of Breton dissident Pontcallec.

More derogation culture

The derogation culture is a stealth abolition of the rule of law and its replacement by tyrannical rule by decree. The trick is to pass a law that is inapplicable and grant selective derogations to the law in a totally discretionary and arbitrary fashion.

Last week, the French government was about to implement such a derogation to its own 75 % tax on incomes above 1 million Euros. It was obvious from start that the second-rate French football league would fall to third rate as the cost of attracting the very best players would nearly double. This is what the dismal science calls the distortionary effects of taxation: if you tax people more, people have lower incentives to work. In the case of football players, this means greater incentives to simply go away. You see, these effects also exist in the real world. How surprising. So when  you put in place a new tax, presumably you are willing to live with the consequences. If this tax is meant to confiscate almost the entire income of the 1,000 best paid workers in the country, one just expects most of these (presumably very mobile) people to go away.  This means, in the dull economist’s jargon, that the distortionary effects are large. If you put in place a tax with large costs, it must be that the benefits are large. Since the tax will eventually bring very few receipts, we can only speculate that the benefits must be that people are overall happier with fewer rich workers around. We could relabel it the hate tax: you pay a tax because others hate you. It can be viewed either as a compensation for the envidious feelings that your existence is eliciting or as a Pigovian incentive to just go away, since your absence generates welfare benefits for the others.

So what happens when the government faces the very predictable consequence of its policy that the top 100 football players in the country are going to leave? It considers implementing a derogation to the tax. This means abolishing the constitutional principle of equality before the law, in order to prevent the French football league from becoming third rate instead of second rate. (In fact it is expected that the constitutional court will veto such an exemption)

Taxes are no longer determined by a tax code (these are for the idiots), but by how much the government — or its constituency — likes you. The government does not seem to like Gerard Depardieu but it likes football players. Hence poor Gerard Depardieu has to leave for cold Russia (when I was young it was rather the Russians who were trying to come here) but the football players can stay if we can sneak in some exception to the law for their benefit.

Or is it that the government suddenly discovered, just when the league informed them that the top football players were about to leave, that this activity generates “positive externalities” so that it needs to be subsidized? Perhaps the French people want more poor people and fewer rich people in their country, except whenever the latter are football players (I suppose that top surgeons,  managers, computer scientists, architects and biochemists are, on the other hand, welcome to join Depardieu).  Perhaps the moral qualities of football players  are such that we want to keep them — despite that they are rich — to serve as an example to younger generations, unlike surgeons, architects and managers?

In any case, the government expected that such a derogation would not pass the constitutional court, so they packaged it in a clever way. They amended the law by putting a cap on the total high wage tax paid by a firm equal to 5 % of its total turnover. In the short run, the cap will obviously be binding only for firms for which a significant portion of the wage bill consists of wages above one million euros, that is for football clubs and perhaps a handful of medical clinics. In the long run, though, nothing prevents a big firm from outsourcing their top paid employees  to some small consultancy. These consultancies will be closely watched by tax authorities, though, because some law says you cannot be a de facto employee without being a de jure employee (this law is intended to prevent firms from asking employees to set up a personal business instead of hiring them, which allows the de facto employer to bypass employment protection legislation). But we can be confident that big firms will find a viable legal arrangement to benefit from the 5 % cap.

This is the problem with rules: because they are rules, everybody can adapt  to them. It is very difficult to craft a rule that would harm Emmanuel Goldstein and nobody else.  Discretion gives much more leeway to politicians in distributing rents to selected groups at the expense of the others.