Monday, November 5, 2012

Competitiveness

I feel compelled to mark the beginning of "competitiveness week" in France. As everyone who pays any attention to these things already knows, Louis Gallois has delivered his commission's report, and the government has promised to "do something" in response, though undoubtedly less than the commission has asked for (fracking, for instance, has already been rejected). It's worth recalling a few simple facts: France's balance of payments has been sinking into the red for a decade. France's unit labor costs are high compared to those of some of its neighbors. French labor market rules are relatively restrictive. And France's social safety net is financed, to a greater extent than is the case in neighboring countries, on the basis of payroll taxes.

So the Gallois commission recommends some changes, the most important of which is the transfer of the social safety net burden to broader-based taxes such as the CSG and the VAT. One can quibble about the details and the amounts, but the basic principle is not unreasonable. Elements of the left that argue that the welfare state should be based on solidarity rather than charity are at odds with themselves when they protest that such a change would shift the burden from "corporations" to "people" or "workers." In fact, the burden borne by corporations is already passed on to consumers, and a broader-based financing is more consistent with the principle of solidarity.

To take the argument any further, however, is to get into the deep weeds of economic analysis. One has to ask about the elasticity of demand for the various components of France's national production. One has to wonder about the sensitivity of imports and exports to relative prices. One has to ask whether France would be better served by shifting its resources into new product areas or by defending those in which it has been losing market share, such as automobiles. There is plenty of room for disagreement. What is to be hoped is that the government will begin to lay out a detailed strategy rather than a blunt rejection or approval of the Gallois proposals. Everyone agrees that changes are necessary, but the time for generalities is over.