Macronomics

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 21^st 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.