Wednesday, July 18, 2007

Confidence Shock

In a moment of candor, Christine Lagarde asserts that the true purpose of the government's fiscal package is to create a "confidence shock." One has long suspected that the kinds of "shocks" of which economists speak in their technical lingo of models, time series, lagged variables, and vector regressions hold little interest for President Sarkozy. He may, however, hearken to a different economist's language, to John Maynard Keynes and his "animal spirits." What he aims to build is an urge to act akin to his own and a Micawberish confidence that "something will turn up." Investors should be lean, hungry, and cocky, not sated, lethargic, and pusillanimously risk-averse.

As for the aspects of the tax package likely to exacerbate inequalities, Lagarde is equally candid: "I accept responsibility for them." If the rich get richer, if tax exiles return home, so much the better, she hopes. She might have defended her position at greater length but appears to regard such a defense as unnecessary; the voters have expressed their indifference to the matter, she seems to be saying.

Nevertheless, the whole question of the widening gap between rich and poor deserves lengthier treatment, especially since a number of recent studies show that the phenomenon is nearly universal, occurring in countries with very different tax regimes, so that tax policy shouldn't be taken as causal (whether and how tax policy might be used as a remedy ex post are separate questions). The real causal elements are in a way more troubling than the simple greed implicated in tax-reform measures that favor haves over have-nots. Perhaps I'll find time to discuss those elements in subsequent posts, but I'm not sure that a blog is the best place for the extended discussion this would require. The point of immediate political interest is simply that Lagarde feels no need to defend the government's lack of interest in doing anything to diminish inequality by way of tax policy. Au contraire.

It will be interesting, therefore, to see if "equality" is invoked, as it most likely will be, when the agenda turns to reform of the special retirement regimes. At that point the government will almost surely attack the "privileges" of those now covered by such regimes. The sacrifices they will be asked to make will be justified in the name of equality, whereas for the present equality is to be sacrificed to the growth that Lagarde expects will follow the tax-cut stimulus and contends "will benefit everyone."


Francofou said...

I'm not sure that a blog is the best place for the extended discussion this would require.

It is the best place for those who might not otherwise benefit, for one reason or another.

Anonymous said...

^^ nice blog!! ^@^

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