The French Model

by Russ Roberts on August 25, 2013

in Budget Issues, Government Intervention, Regulation, Uncategorized, Work

Sometimes the impact of a set of policies is not obvious immediately. When Japan was riding high in the late 1980′s, a lot of people suggested that their model was one to emulate. Their public/private partnership with lifetime employment seemed to be working well. Japan had high growth rates and their future seemed limitless. It was only a matter of time before their economy surpassed America’s. It didn’t turn out that way.

France is another example. Why can’t our economy be more like France’s, many people asked. They have a high standard of living, long vacations, a very generous safety net and a relaxed, healthy lifestyle. They don’t work as hard as Americans and that’s good, we were told. But maybe the impact of those policies takes a while to unfold. Maybe the incentives don’t have their full impact right away. Steven Erlanger at the New York Times reports that the French model does not appear to be sustainable:

For decades, Europeans have agonized over the power and role of Germany — the so-called German question — given its importance to European stability and prosperity.

Today, however, Europe is talking about “the French question”: can the Socialist government of President François Hollande pull France out of its slow decline and prevent it from slipping permanently into Europe’s second tier?

At stake is whether a social democratic system that for decades prided itself on being the model for providing a stable and high standard of living for its citizens can survive the combination of globalization, an aging population and the acute fiscal shocks of recent years…

The French are justifiably proud of their social model. Health care and pensions are good, many French retire at 60 or younger, five or six weeks of vacation every summer is the norm, and workers with full-time jobs have a 35-hour week and significant protections against layoffs and firings.

But in a more competitive world economy, the question is not whether the French social model is a good one, but whether the French can continue to afford it. Based on current trends, the answer is clearly no, not without significant structural changes — in pensions, in taxes, in social benefits, in work rules and in expectations.

My favorite line in the whole piece is:

The French are justifiably proud of their social model.

What’s the justification for that word “justifiably?” It’s evidently not a sustainable or realistic model. It’s like someone in 2008 saying “The United States is justifiably proud of their home ownership rate.” It’s not justified. The opposite. We should have been ashamed. The home ownership rate was artificially increased by unsustainable means that ultimately caused us to pay a terrible price.

After talking about how uneager many are to press for change, Erlanger observes:

There is nonetheless an underlying understanding that there will be little lasting gain without structural changes to the state-heavy French economy. The warning signs are everywhere: French unemployment and youth unemployment are at record levels; growth is slow compared with Germany, Britain, the United States or Asia; government spending represents nearly 57 percent of gross domestic product, the highest in the euro zone, and is 11 percentage points higher than Germany. The government employs 90 civil servants per 1,000 residents, compared with 50 in Germany.

Hourly wage costs are high and social spending represents 32 percent of G.D.P., highest among the industrialized countries; real wage increases outpace productivity growth; national debt is more than 90 percent of G.D.P.

About 82 percent of the new jobs created last year were temporary contracts, up from 70 percent only five years ago, not the kind of full-time work that opens the door to the French middle class. That keeps nearly an entire generation living precariously, no matter how hard people study or work.

The good news?

When the French work, they work hard; labor productivity, perhaps the single most important indicator of an economy’s potential, is still relatively high, if dropping. But with long holidays and the 35-hour week, the French work fewer hours than most competitors, putting an extra strain on corporations and the economy.

But as others have pointed out, their high labor productivity relative to other nations is a mirage. France has a high minimum wage–over $11 an hour. The least productive members of their work force aren’t working. So measured productivity of those who are working is high. If America raised its minimum wage, average productivity would increase too–not because anyone was more productive but simply because there would be fewer low-skilled workers in the economy who would bring down the average.

The overall theme of the piece is to ask whether the socialists will be able to dismantle the socialist policies that are holding France back. Should be interesting to watch. But the lesson for me is to remember that not every policy has an immediate impact. Culture can surmount some policies for a while but eventually it is hard for culture to overcome the power of incentives. The danger of this lesson is to think that you’re always right and that it is just a matter of time before your worldview is found to be triumphant. The best version of this challenge is the line that Marx was so far-seeing that his predictions haven’t come true yet. So while I am aware of my bias, it does appear that a model of growing bureaucracy, growing government spending and a heavily regulated labor market are unlikely to produce a good outcome for an economy.

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