Saturday, November 3, 2007

Economic Policy

Alain Q. asks for "conclusions" about Sarkozy's economic policy (for related data, see previous post). There are two main thrusts to the initiatives taken thus far. One is to increase the number of hours worked per capita by changes on the supply side of the labor market (chiefly increasing the period required to receive full benefits at retirement, secondarily by detaxing overtime, a measure of dubious effectiveness). The other is to give an immediate fillip to aggregate demand via tax deductions (mortgage, fiscal shield, inheritance, etc.). The hope was that the latter would give a short-term boost to employment to ease political pressure in advance of further labor-market changes in the form of a single labor contract, which can be expected to meet with intense opposition.

This plan, which has a certain logic to it (the comparative data presented show that France probably should increase its hours worked per capita in order to sustain its social security system), has already met with unforeseen obstacles: an international conjuncture markedly less favorable than when it was conceived (subprime crisis, falling dollar, inflationary pressures), and more intense resistance to the first stage of labor-market reforms than anticipated (how intense we will know better by the end of this month).

The plan does not address several troubling features of France's economic picture. One is the high percentage of workers at or near the minimum wage. In this respect France is an outlier, probably even more so than in respect to hours worked. The compression of wage dispersion at the bottom end discourages initiative and probably contributes to the very long average duration of unemployment. What to do about this is not at all clear. Lowering the minimum wage is not the answer and is politically infeasible in any case. Ending subsidies to low-end jobs would be disastrous in the short run. More attention needs to be paid to management practices within French firms (Thomas Philippon's book Le capitalisme des héritiers raises many of the pertinent issues). The government's role in this respect may be largely hortatory, however. My knowledge of the picture is insufficient to say much more.

A second area thus far untouched by Sarkozy is training. University reform is essential to better economic performance, but the university reforms effected thus far are purely administrative. The slow motion on this front is hard to understand. So is the rather lackadaisical approach to reducing the number of civil servants: public employment has been allowed to grow too much in recent years. Perhaps the explanation for both of these failings is that in general Sarkozy's style is biased toward the short-term. Since his communications strategy is to keep himself front-and-center, he needs to have a steady stream of "results" in the form of new legislation, treaties, accords, "Grenelles," etc. The public sector has to be shrunk by attrition, which can come only slowly, and university reform will not show results for years even if pursued with more vigor than Sarko has seen fit to expend in this area.

Still, does the short-term focus mean that he has no long-term strategy? No. As outlined above, he hopes that structural changes in the labor market supply side will solve many problems, as economists have told him they will. But he is also working in a more Colbertist mode to reposition France as a supplier of both energy and green technology to Europe. The GDF-Suez merger, promotion of Areva and its nuclear solutions, overtures to Gazprom, negotiations with Libya and Algeria, and adumbration of a Mediterranean Union all figure in this long-term reorientation of the public-private partnership regarding the major item in the national accounts that is energy. If the dollar continues to fall and energy prices continue to rise, this could become increasingly significant.

Finally, the sharp rise in food prices may oblige Sarko to rethink his somewhat protectionist stance (via "quality regulation") when France assumes the EU presidency next June.


Anonymous said...

Thank you Arthur for this balanced analysis of Sarkozy's policies.
My own impression is that he lost an opportunity when he didn't operate a "big bang" of reforms right after his election when the opposition was still stunned in defeat.
The Socialists are not in better shape now, but he has given time to a coalition of conservatisms to progressively aggregate. There is nothing in common betwen lawyers, railway workers, teachers, Air France stewards and others but, all together, they tend to slow down the pace of reforms today to a crawl. Tomorrow to a stop ?
Much will depend on whether public opinion will go on supporting the reforms in the face of the coming strikes , or will give up already. As you said, end of november will be crucial.

Anonymous said...

Great blog! It is a goldmine for followers of French current events.

French workers are correct to be sceptical about Sarkozy's mantra that more work will result in commensurate rewards. Sarkozy's own ministries demonstrate the opposite.

I worked for the French Embassy in Washington for many years, as one of the hundreds of local recruits ("agent de droit locale") who basically do all the office work and US-directed liaison. Our workweek was officially 40 hours, not 35, and we were expected to work up to 500 hours of overtime per year, unpaid, on pain of dismissal.

The Embassy is part of the French State Department, with a policy that refuses to recognize American employees as equal to French expatriate employees. American local rectuits get none of the benefits or protections which their French co-workers enjoy (no job security, unionization, promotion or raises, overtime pay, severance pay, health care, pension plan, etc.)

The French state's official policy imposes an apartheid system of haves and have-nots on its global workforce. Why should French citizens expect justice from the same government?