About fifteen years ago, I was doing my
best to introduce would-be interpreters to the basics of economics, of which
students with a background in languages and the humanities generally have little
idea but which is essential for any aspiring conference interpreter. I was
talking about the French economy and repeating a point made by many economists
that its level of public debt was unsustainable. One student ventured to ask
why the French could not choose to have a shorter working week, longer holidays
and earlier retirement than most other Europeans. My answer was that they were
perfectly entitled to make that choice but if they did, they couldn’t expect to
continue to enjoy world class health care, some of the best infrastructure anywhere
and generous retirement provision, because the country would not be able to pay
for it without levying punitive taxes and incurring ever greater levels of debt
that future generations would be burdened with.
Fast forward fifteen years to Emmanuel Macron’s first Armistice day ceremony as President last November 11: “My daughter has
just got a job and I wonder what kind of pension she will have when she
retires” asked an onlooker whose outstretched hand he had just shaken. His spontaneous answer
was: “I’m all in favour of the welfare provision that we are able to afford”.
As the contours of Macronomics start to
take shape, one year into his presidential term, it seems worthwhile to look
more closely at the implications of this answer for clues to his basic economic
philosophy which, it seems to me, is very different from the consensus view
that has prevailed in French decision making circles for as long as I have
lived here.
During those fifteen years of course, we
have witnessed how a national economy like that of Venezuela can descend into
chaos or, closer to home, the sad and sorry state of the Greek economy over the
past ten years to understand what can happen when governments make explicit or
implicit promises to their people that they are subsequently unable to keep.
Without going so far as to suggest that the French economy is close to falling
into similar straits, it cannot be a matter of indifference that its annual
budget has not been in balance since 1974, and that its national debt is now
close to 100% of GDP, a portion of which is held by non-residents. With slow
growth, high unemployment and interest rates starting to rise from record
lows, the danger signals are there for all to see.
Emmanuel Macron is not the first leader of
France to have seen them but he does seem to be the first to take them
seriously enough to want to do something about it. Others before him have tried
but failed. Going back no further than 2007, one remembers François Fillon,
when he was Nicolas Sarkozy’s Prime Minister, declaring publicly that he was at
the head of a “bankrupt state” (“un état
en faillite”). All he got for this rare admission of reality was a widely
reported dressing down from the President for saying it, after which the
financial and banking crisis broke and the whole episode was forgotten. The
“bankrupt state” continued to borrow wildly to contain the damage.
Macron seems intent on breaking the vicious
circle of rising public spending funded by higher taxes and higher debt and is
doing so with his now familiar single-mindedness, driven by an economic doctrine
that breaks radically with the comfortable but lazy consensus on economic policy
that has prevailed since well before he was born.
The first part of this vision concerns his
attitude to wealth. His highly articulate left-wing opponent, Jean-Luc Mélenchon
has dubbed him “President of the rich”, a charge that has stuck in public
opinion. It’s not difficult to see why. By emasculating the wealth tax, that
now only covers real estate assets, introducing a flat tax of 30% on financial
income but at the same time increasing the CSG tax by 1.7% for almost everyone,
including a majority of pensioners, he has indeed laid himself open to the
charge that he has favoured the rich, particularly the very rich, to the
detriment of the less well off. The counter measure to this increase in the CSG,
a reduction in social charges for those in work, has attracted a lot less
attention. Human nature being what it is, people are quick to complain, as
pensioners have done very vocally, about higher taxes but never turn out to
manifest their joy at lower ones. Macron was at pains to explain this policy, a
well-trailed part of his election programme, in another spontaneous comment to a
lady in a crowd during a walkabout in a provincial town recently. The lady was
complaining that she had contributed all her life to get a decent pension and
that now she was seeing it more heavily taxed. “No”, Macron said, “what you
contributed to was your parents’ pension. What I am asking you to do is to help
your children contribute to your pension by making it easier for them to find a
job and taxing their earnings a little less”.
In another revealing comment during a TV
interview some months ago, Macron dismissed the idea that he was reducing tax
on the wealthy because he believed in trickle-down economics. He expanded on this by saying that he does not
believe that wealth trickles down from the rich to the poor but that the rich support
the poor by their investments in the economy. He expressed it in the seemingly
puzzling image of “the lead mountaineer on the rope” (“le premier de cordée”) pulling the rest behind him. Except that the
image only makes sense if everyone behind the lead climber also makes an effort. An equivalent expression that suggests itself to me in English is: “everyone must
pull their own weight”. The more well off must show the way ahead by investing
their wealth in the economy, the justification for reducing their level of tax.
But instead of simply benefiting from the trickle- down effect, the less well off
must pull their weight too, by working more productively and being willing to undertake
further training to change jobs more easily. This reading of Macronomics is also
consistent with a remark in a recent interview by an up and coming MP in
Macron’s party, Amélie de Montchalin, a member of the Finance Committee of the Assemblée Nationale. She too has a
background in economics and banking and she too has a gift for plain language: “We
are not”, she said, “pursuing a policy of redistribution”.
This comment has gone largely unreported in
a country that has always had a particularly generous interpretation of the
notion of equality. Generations of politicians, from every part of the
political spectrum, have taken it for granted that Marx was right
about the exploitative nature of capitalism and that therefore money must consistently be
taken from the rich in the form of taxes and redistributed to the poor in the
form of social benefits. Thomas
Piketty’s recent tome, “Capitalism in the 21st century”, for all its detailed documentation, seems basically to be a modern day restatement of this belief, except that poverty in France today, however visible in some parts of society, has little in common with the extent and level of povery in Marx's time. So entrenched has this broad and comfortable
consensus become over the years that it has led to an inexorable increase
in taxes, very visibly on those who have, or earn, a lot of money,
more stealthily in the form of corporate taxes, high rates of VAT and other
consumption based levies, and a concomitant increase in social benefits, not to
speak of almost automatic annual salary increases for an army of civil
servants, usually with no productivity strings attached but simply to keep them
sweet and off the streets. Hardly surprising that the amount of wealth
redistributed by the state, at over 45% of GDP, is one of the highest in the EU. And
when tax increases no longer suffice, borrowing fills the widening gap,
justified in the minds of many by another somewhat out-dated economic doctrine
of deficit spending, designed to inject demand into the economy. The problem is
that high taxes have gradually discouraged ambitious young people who, having
benefitted from some of the world class training opportunities France has to
offer, vote with their feet and take their ambitions, their talents and their
skills to less highly taxed countries. It was reported the other day that their
number rose sharply between 2009 and 2015, the last year for which data is
available. As the French saying goes: “Too much taxation kills taxation” (Trop d’impôt tue l’impôt). When François
Hollande seriously considered raising the top rate of income tax to 75% soon
after the start of his presidency, his then chief economic advisor, Emmanuel
Macron, exclaimed: “sounds like Cuba -
without the sun !” Rising debt, given a
powerful boost by the crisis of 2007 and 2008, now requires billions of Euros out
of the annual budget to service it. Having become France’s leader, Macron seems
to be doing his best to make it clear to the country that he is determined to
break with an economic policy biased heavily towards wealth redistribution, funded
by taxes and debt, and replace it with one of wealth creation first and
foremost, driven by investment, work and training. In a word, supply side
economics “à la française”!
All this also goes a long way to explaining
his focus on work. The radical overhaul of apprenticeships and vocational
training is a good illustration. For too long, such policies have been
shaped in cosy negotiations between employers and unions and largely funded by
the state. The system has gradually become ossified, spawning bureaucracy and
sprinkling money over a large number of training courses with little relevance
to job opportunities and from which the unemployed were often excluded. (“Nice work if you can get it” – November 23,
2017). It is also suspected that large sums of money, supposedly earmarked for
training, have ended up financing organisations on both sides of industry. No
need to look further than the dramatic mismatch between skills required by
industry and the crying lack of them among the three million or so
unemployed to realise that the system has reached the limits of its
usefulness. Ordered by Macron’s government to come up with something radically
different, the industry/union partnership could only agree on more of the same. The government promptly rejected their conclusions and imposed its own,
focused more on the needs of trainees and those of industry. Whether a system steered by the government will produce better results remains to be seen.
But even if it takes time to do so, the new system can hardly do worse than the
old. A similar, although for the moment
less radical, overhaul of unemployment and other social benefits is also quietly
being introduced.
However much all this will contribute
to growth and employment though, it is only part of Macron’s underlying purpose of reducing public spending. A far bigger drain on the public purse is
the uniquely French pension system and its reform would therefore have a far bigger
impact on spending than anything mentioned so far. Pension reform, I would suggest,
is the main pillar of Macron’s much trumpeted “profound transformation” of the
country and it is entirely consistent with his two revealing comments to onlookers
reported above. I shall return it in more detail in the next post.