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The French bidding constraint has nothing to do with more taxes on inheritance

Jean-Pierre Dumas

Monday, July 12, 2021

Once upon a time there was an economist called D. Rodrik who published, with R. Hausman & A. Velasco, an article on the methodology to produce a country’s diagnostic (cf. “Getting the Diagnosis Right’’ Harvard, 2005).

There were two basic ideas, 1) a country’s economic diagnostic consists to look for the country’s “binding constraint” (the opposite of a traditional diagnostic which tries to be exhaustive and does not explain anything). 2) a small reform attacking this binding constraint may trigger other reforms and provoke a virtuous chain reaction toward more growth and development.

This was a seminal paper for Economists who were working in the development field. It was a veiled criticism of the traditional job of development institutions (EC, WB, and the IMF) who are designing, for poor countries (not for rich countries who, of course, have no structural bias) complex and exhaustive matrix of “structural” reforms to do before a very precise date…(the matrix conditionalities). Each institution was competing to have the more conditionalities to show to the world their muscles and economic rigor. Needless to say, that the poor countries did not know where to start and were window dressing pseudo reforms. For once an economist was proposing a clear, consistent, and effective methodology to deal with a country. Look at your constraint and deal with it, it will trigger a positive chain reaction and your country will go to a higher level of development. This methodology is not limited to poor countries and could apply to every country including a country like France.

Therefore when I read the article; Inequality and the Macron commission Dani Rodrik and Stefanie Stantcheva-2021-07 Project Syndicate, I was expecting the same methodology for France, look at the French biding constraint and propose a way to alleviate it. Apparently, these two Harvard Professors have completely forgotten the 2005 article. No diagnosis for France, only the traditional French socialist ideology, the catchword “à la mode” “inégalité” (well this is the French device, but we were expecting from Harvard’s Professors of economy a more lucid vision). We perfectly understand that politicians have to speak populist language with a lot of catchwords such as climate change, inequality, new technologies, etc. These are issues without a solution if you look at them with an ideological point of view.

First there is no diagnostic (à la Rodrik) for France; therefore the authors placate their own ideology on France (a country they should know better). France is a country with a lot of flaws, but inequality is not the main. It is, according to the OECD, one of the least inequalitarian country. This is not the case for the US (so to start with inheritance tax is the wrong approach). Nevertheless, as mentioned in the article, inequality is not limited to income distribution but the lack of job opportunity and job promotion, which is certainly one of the French characteristics.

There is a very high unemployment rate for young and old (in France you are considered as old at 45). The structural unemployment was 8.5% of total labor population in France and 4% only in the US. France has with Greece and Spain the highest structural unemployment ratio. Yes, inequality measured by the Gini coefficient is higher in the US but French unemployment is higher in France and this is particularly true for the young.

Figure Structural unemployment

Source: OECD

Therefore, we expect that the authors will tell us how to deal with this characteristic (low inequality-high unemployment). To be more precise, the structural unemployment (an economic concept which shows the level of unemployment due to structural factors) will not be cured by the traditional policies advocated by keynesian economists, more public expenditure, more fiscal deficit.

What is the “binding constraint” for the authors? “Lack of social mobility.” What is the solution proposed by these authors? “A unified inheritance and gift tax” of course progressive based on “the cumulative amount received instead of taxing wealth transfers at each death.” What a reform…and it is supposed to address French inequality, French structural unemployment.

Un problème mal posé ne peut être résolu’’ G. Bachelard. This is typically a problem posed in ideological terms (in the pure French socialist tradition). Allow me to try to follow the Haussmann, Rodrik, Velasco (2005) methodology for France. The problem of France is not that it lacks tax and social expenditure. France has too much of both.

The French biding country is too much public expenditure and too much social expenditure, therefore too much tax. If you look at the French expenditure and tax ratio, you will see that France is the country with the highest ratios among OECD countries and the highest social expenditure (cf. the very interesting study by J.-J. Hallaert & M. Queyranne, IMF/WP/2016).

It is important to reduce the public expenditure ratio in France and for countries with high expenditure ratio this will promote growth and employment (cf. Alesina, Favero & Giavazzi). If a lot of expenditure makes the French social landscape more human than the US one, within “social” expenditures we have a lot of bureaucratic and useless expenditure and it is difficult to pinpoint them. Therefore, the (leftists) economists will say that we need more expenditure for “social inclusion” (another catchword)

If I say that France has too much health expenditure, everybody is going to say, are you out of your mind? We are very proud to have an efficient and quasi-free education and health system. Well, of course, I appreciate and enjoy this system generous and rather efficient. The problem is to ask if we cannot do the same with less expenditure? This is an economic problem of a better allocation of scarce resources.

If these economists cannot solve the problem, this is because they look at it from a wrong angle, we cannot solve all social problems through an increase of expenditure (no more possible in a country which has an expenditure ratio amounting to more than 60% of GDP). We cannot reduce inequality through an increase in tax (in a country overburdened with tax, the cost will be higher than the benefit and wealth inequality is not the issue).

The approach should, in my view, be pragmatic and lays on an analysis of the usefulness of expenditure from a social and economic point of view.

Let’s take for ex. health expenditure, there is within this item a lot of useless public bodies which have nothing to do with providing health services.

There is a Ministry of Health with various directions, plus a lot of public bodies ("Établissements publics") (Santé publique France, la Haute Autorité de Santé, les Agences régionales de Santé, la Direction de l’Agence sanitaire pour les sciences de la vie. L’Agence épidémiologie France, Le Centre national de recherche scientifique en virologie moléculaire, l’Agence nationale de sécurité et du médicament, le haut-commissariat de lutte contre les épidémies, le haut-commissariat pour la stratégie vaccinal, etc.) None of these bureaucracies are very useful from a health point of view, they don’t have a financial budget (except the salary component), they have no clear mandate, they have overlapping missions and they don’t bring anything in terms of health. Some have been created to give a position to high-level civil servant who needs a position of Director. There are various schools for public servants (ENA, École de Santé Publique, administrateurs civils), the administration should provide them a job with a permanent position at the end of their school; therefore there is a need to create and enlarge bureaucratic bodies. This is the reality, the official speech consists to say the health sector lacks of financial means. Well, if there are not enough medical doctors, nurses, there are too many administrators in charge of controlling, supervising the health (and education) sectors. Nobody is responsible for this policy, all governments left and right have followed the stream, always more expenditure without asking what is the use of it?

For example, what is the use of “Agences Régionales pour la Santé (ARS)” health bureaucracies which stated objective is to rationalize health expenditure but with extremely high salary expenses not useful for health purposes. There are 800 civil servants for l’Agence régionale de la santé of one region, Agence Grand Est and there are 18 regions in France (more than 10000 civil servants (no medical doctors) to send contradictory orders to hospital in addition to a Minister of health; is it not too much? Who is the economist who wrote that this bureaucratic institutions have to be streamlined, canceled?

France has the characteristic to have too many decentralized bodies (more than for the US with a population five times lower). We call it, in French, the “millefeuilles administratif.” The State (l’Etat with a capital E please), 27 regions, 100 départements, 342 arrondissements, 4000 cantons, 17000 grouping of municipalities and 36000 municipalities, each time we add a new structure (for decentralization sake) with more public servants to manage these elected bodies which have limited and overlapping power. For unemployment we have various agencies to deal with unemployed without clear lines of responsibility, the result is inefficiency to deal with unemployed people.

The highest public expenditure before wages for civil servants (about 12% of GDP) is pension expense (14% of GDP). France has a hidden preference for old age to the detriment of the young (to finance pensions, the state has to levy special taxes («prélèvements obligatoires») on wages source of unemployment, therefore the young unemployed pay for the old.

All these expenditures are classified within social expenditure and have nothing to do with social objectives. Therefore, the first thing to do, to deal with the French binding constraint is to analyze, with a critical eye, all these expenditures and to propose a reduction/cancelation of the most useless. We fully understand that US Professors of Economy cannot do the job (French ones either), but in this case, they should at least not propose to add up “social” expenditure to other “social expenditure”.

The job of public expenditure review should be done by the French Government, it is done (rather well) by the Court of Auditors (“Cour des comptes”). None of their recommendations are implemented. We are like a poor country we don’t implement structural reforms; this is why we listen to the same advises given by the same keynesian economists, more fiscal deficit cum more monetary easing. This does not address the issue and it is a recipe to decline.

Why these Economists never criticize excessive and useless expenditure? Because they need specific and difficult information to find (mathematics will not do the trick), because it is not politically correct to criticize the French bureaucracy, and perhaps because it is more convenient to say we need more than the opposite.

If unemployment is one of the main characteristics of the French model, then what can be done from an economic point of view? Not raise the minimum wages (the smig) above productivity growth, this is what the authors said rightly with a lot of circumvolutions, “Absent a commensurate rise in productivity, government-mandated increases in wages at the bottom can create a trade-off between incomes and employment, especially for those just entering the labor market.”

Now, we have to look at the French tax policy which explains the French unemployment and lake of competitiveness. The French tax problem has nothing to do with not enough inheritance tax (Ms. Stantcheva), it has to do with too many distortive taxes, too many taxes on wages to finance social programs (pensions, health), sources of unemployment for the non-protected (tenure jobs are very important in France and are part of the unemployment problem, never mentioned by these socialist professors). Too many taxes on production (an enterprise pay taxes in France even if it does not sell anything), in addition to taxes on the value added, you have turnover taxes in France). The generous and costly French social system is not financed by households (like in Denmark) but by enterprises and this is a structural weight on their competitiveness, this explains largely their reluctance to hire. None of these distortions are mentioned by the authors, what they don’t say is more important than what they say. Either they don’t know or they don’t want to know.

The French binding constraints will not be dealt with wrong and populist solutions (protectionism against globalization). The authors propose “after a participative process to restrict imports that threaten jobs” sic. This is nothing else than protectionism (à la Trump) disguised under moralistic objectives (of course we will mix protectionism with environmental, and human right protection).

The authors think that globalization has to adapt to the French rigid social laws. We think the other way around.

Since France has a higher tax ratio than other countries and higher social laws, French politicians want to oblige other countries to follow “the French social model”, others may not follow the same enthusiasm for the French social model. There are already a lot of social, environmental rules and procedures fixed by the European Commission which are more often a break on economic growth than incentive. The French labor code has more than 1000 pages on what ground impose these rules to other countries and what is the French role in the world (2.5% of the world GDP)?

The authors want more social mobility in France, they are fully right, this is not with a new tax on inheritance, more social expenditure that we will reach this objective but with less…we need a more open society with more opportunities, without permanent job tenure reserved for happy few, more professional training, more competition at all levels, and fewer taxes on labor.

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Prof Rodrik response

Thank you for sending us your critique. We appreciate your candid views. But I must say that I disagree with your premise. The approach we take is indeed fully consistent with the diagnostic method pr