Tuesday, November 6, 2012

Piketty on the Gallois Report and Government Reaction

Here. I see here, clearly articulated, one line of emerging critique of the government's plan: it is intellectually incoherent, Piketty argues, "illegible," unclear, etc. Bernard Girard echoes the thought here. Given the total irrationality of fiscal debates in the US, I think "illegibility" is a rather mild criticism, though one can understand the disappointment of intellectuals who had hoped for a complete overhaul of the tax system. A fine idea in principle, but such ambition requires a more resounding mandate than Hollande received (for a program quite different from the one he has enacted, moreover) and a party more united than the PS about where it wants to take the country. Given the political constraints, I'm rather pleased that Hollande has moved, with some dispatch, toward a policy that holds out some promise of mild improvement. Of course the cost-shifting is merely a short-term response to a deteriorating competitive situation; the long-term response will be the real test, and it may be that a government forced to pinch its pennies ever tighter will be tempted to skimp on the investments in R&D, infrastructure, and education that are ultimately more important than the "legibility" of social-security financing.

Gallois Theory

Évariste Galois was a young mathematician who wrote down his famous Galois theory on the eve of a duel in which he died. Louis Gallois, haut fonctionnaire and former head of EADS, has seen his own Gallois theory immortalized almost as instantaneously. He delivered his report yesterday; today the government accepted it, in essence if not in fine detail.

And so the Hollande administration has been brought in short order to a total reversal of its own stance on the "social VAT." One of its first acts was to abrogate the increase in the VAT enacted under Sarkozy, in the last days of the old regime. And now, barely six months later, Hollande will pay for the €20 billion tax credit to employers (in lieu of the elimination of payroll charges advocated by Gallois) by raising the VAT. Is it any wonder that voters are confused about where Hollande is headed? (And to add insult to injury, Mediapart claims, in a somewhat overwrought article, that parts of the Gallois report were written by a card-carrying member of the UMP--the horror!)

On the other hand, the destination is perfectly clear. Hollande has embraced a view of French competitiveness problems that is widely shared by economists, employers ... and politicians of the center-right. Unfortunately, it is a view also only recently attacked by Hollande himself as shot through with "injustice." The choice of the VAT over the CSG to finance the measure is apparently in part due to technical advantages but in part due to the plain political fact that a hike in the CSG appears on each employee's weekly pay stub, whereas a hike in the VAT is felt in a more diffuse way at the eheckout counter. And bear in mind that the financing also depends on an additional €10 billion in government spending cuts, on top of spending cuts already promised to reduce the budget deficit. The arithmetic of the Hollande budget is beginning to look as shaky as Mitt Romney's.

A propos of which, I must go off to vote for Obama before the lines get too long at the polls.