France Was Already Struggling with Government Spending. The Uncertainty with Macron's Snap Elections Did Not Help.

With French President Emmanuel Macron losing his grip on political power, he decided to disband the French Parliament and call for a snap election. Not only did his political party Renaissance lose a significant amount of seats earlier this month, but a loosely established coalition of the Left, the Nouveau Front Populaire, gained enough seats to hold a plurality. The Right-leaning party, the Rassemblement National, underperformed. Needless to say, this has thrown French politics into a frenzy. If you think that is unrelated to how the French economy fares, you would be wrong. Last week, the International Monetary Fund (IMF) released its Article IV Consultation for France in which the IMF analyzes the state of the French economy. Guess what the report revealed? This little gem:

"Heightened political fragmentation and rising policy uncertainty domestically could delay fiscal consolidation and reform efforts, weighing on confidence and raising fiscal risks. Social tensions could also materialize...Over the medium term, deepening geoeconomics fragmentation could expose France to trade and supply disruptions, increased protectionism, and rising input costs, lowering potential growth (IMF, p. 10)." 

This is not to say that everything was going swimmingly in the French economy and Macron's decision for a snap election made the economy topsy-turvy. Yes, the credit rating agency Moody's brought up similar concerns as the IMF, mainly that fiscal consolidation is unlikely to happen because of the new Left coalition in power. Its government spending was already on an unsustainable track, a point I made in 2014 which I chided France for its debt-to-GDP ratio and in 2018 when I illustrated how France's welfare spending is out of control.

It is not only a point I have made while blogging. It was a point made when credit rating agency Standard and Poor's downgraded France's credit rating from AA to AA- in May 2024 because France's deficits increased higher than anticipated, thereby driving the debt-to-GDP ratio. Standard and Poor's is also anticipating that interest payments will increase from 3.3 percent in 2023 to 5 percent in 2027, which is a major issue both for government solvency and quality of life for everyday citizens.

France's economy was struggling due to the COVID-19 pandemic, the energy crisis as a result of the war in Ukraine, and an underperforming economy in 2023 (IMF, p. 12). There are also increased spending pressures on pensions and retirement, which I commented on while  In 2023, commending Macron in 2023 for raising the retirement age for Social Security because French spend in Social Security is off the charts, even by European standards. 

While there seems to be some stabilization and recovery of the economy, it is not enough to bring down France's debt-to-GDP ratio. Whether France's economy stabilizes or ends up being successful remains to be seen. What is foreseeable is that much like with the United States, the extent to which France can get its government spending under control will play a major role on what that economic future looks like. 

The Argument for France's Short-Haul Flight Ban is a Load of Hot Air

There are those who think that climate change is the single greatest threat to mankind. Climate change activists think they are reaching for the stars in helping the world....or in France's case, reach for the skies. A couple of weeks ago, the French government banned flights that could be taken by train in 2.5 hours or less. The purpose of such a ban is to lower carbon emissions in the fight against climate change. Whether it is regulations encouraging electric vehicle production, banning gas stoves, or a carbon tax, we should ask about the merits of the policy of a short-haul flight ban. 

First, as I brought up in April, climate change is not a crisis. Using implausible assumptions in climate change modeling does not do any favors, especially when it comes to environmental policy. However, for argument's sake, let us assume that climate change is something we need to address urgently. The short-haul flight ban is still a problem, and I am not talking about my more general kvetch with economic bans. 

It is unlikely that this ban will have any major impact on carbon emissions. The three routes being prohibited under the ban are from Paris to three cities: Nantes, Bordeaux, and Lyon. These three routes account for 5,000 out of the 200,000 domestic flights (or 1 out of 40 flights). It is not simply a matter of how many flights, but how much fuel is burnt. A study from the Journal of Transport Geography shows that flights shorter than 500 kilometers across 31 European countries accounted for 27.9 percent of departures but 5.9 percent of fuel burnt (Dobroszkes et al., 2022). Airplanes are responsible for 2.5 percent of global carbon emissions (Oxford). Assuming that a) the European rates above apply to overall trends, and b) the whole world banned short-haul flights, 5.9 percent of 2.5 percent is only 0.15 percent of global carbon emissions. 

As Mercatus Center economist Veronique de Rugy points out, this ban comes with the other negative consequence of it being more deadly. Macron's idea of banning short-haul flights is to incentivize greater train usage. Forget that extra time spent on the train or that taking the train burns about 57 percent more fuel per capita than a plane ride (ibid). Harvard University found that the probability of dying in a plane crash is about 1 in 11 million; it is 1 in 5,000 for an automobile. That is an increased likelihood of death by a factor of 2,100! Given that at least some French citizens would divert their travel from plane to automobile, it would not be a surprise if we see an increase in French traffic deaths.     

I can think of larger examples of political theatre, whether it was the harmful lockdowns, ineffective COVID travel bans, plastic straw bans, or the Transit Security Administration's security checks at the airport. At the same time, France is trying to focus on low-hanging fruit that do not solve major problems while causing bigger problems. This potentially harmful symbolism is par for the course with political theatre. La plus ça change, la plus c'est la même chose. 

Protests in Paris About Raising Retirement Age Beg Questions About Social Security Solvency in France and the United States

It might have faded from the U.S. media's attention, but France has continued the protests that started on January 19, 2023. I know that holding protests is part of French tradition. What has the French so upset that they have been protesting for the better part of four months? Pension reform. In a very unpopular move, President Emmanuel Macron raised the retirement age from 62 to 64 by 2023. Why would he do something that would have the French citizenry in such an uproar?

France has one of the lowest retirement ages in the industrialized world. France also has one of highest percentages of public spending on pensions (OECD). France spends 14.5 percent of its GDP on pensions, which is almost double the OECD average of 7.7 percent. Furthermore, the worker-to-retiree ratio is expected to decrease from 1.7 in 2019 to 1.2 in 2070. This worker-to-beneficiary ratio is even more dire than that of the United States' Social Security by 2040. 

This past Friday, Fitch Ratings downgraded France from an AA credit rating to AA-. This downgrade took place because of weak economic growth and continued increase in the debt-to-GDP ratio due to upward expenditure pressures (including pensions and social benefits). If that were not enough to satisfy you, look at the European Commission's 2021 Aging Report. The EC found that unchanged eligibility requirements (especially age) would have a sizable impact on pension expenditures. For France, it would mean an increase of 2.2 percentage points of GDP (EC, p. 95), which is higher than the European Union average. 

The people over at the far-Left Fairness and Accuracy in Reporting (FAIR) were dismayed by the U.S. media's coverage of these protests because it did not even entertain the possibility of France increasing taxes to fund the pensions. Let's entertain the thought for argument's sake. A panel of economic experts sponsored by the University of Chicago was asked about France raising its retirement age in comparison to two other policy options. The first policy option was raising social security taxes. Out of the economists that did answer, 87.8 percent believed that raising the retirement age was a better option to preserve the financial viability of France's pension system than raising taxes. 

As OECD data indicate, France already has a high marginal tax rate for social security contributions. According to accounting firm PwC, "the contributions are shared between employer and employee; on average, the employer 's share of contribution represents 45% of the gross salary. For 2022, the employee's share of French social contributions represents approximately 20% to 23% of the remuneration." 2022 calculations from the Right-leaning Tax Foundation found that marginal tax rates in France's social security taxes are so barking mad that a pay raise could face as much as 93 percent of that raise being taken as tax revenue. Raising taxes higher would only create deadweight loss that suppresses France's economic growth. 

The second policy alternative is lowering the current benefits. As University of Minnesota economics professor Kjetil Storesletten brings up, current benefit amounts are locked into place. Future benefits take a long time to pass and take into effect. The political backlash would be higher for cutting benefits than raising the retirement age. Similarly, there has been political backlash in France (i.e., 1987, 1993, and 2010) when the French government cut spending elsewhere in its budget. 

That being said, it is not like the France cannot handle it. France did not always have such a low retirement age. Former President François Mitterrand changed the retirement age to 60 in 1983. Beforehand, the retirement age was 65. Plus, the retirement age increased from 60 to 62 in 2010. I am sure that those who are protesting (middle-aged workers in particular) are worried that they will not have the same benefits. 

I would suggest encouraging French citizens to save retirement. The sad truth is the cultural expectation set for retiring French citizens is that the government will take care of them in their later years. On top of that, you have a different work-life balance that views early retirement in a more positive. How work was viewed and valued was clear to me when I visited France and talked with French citizens a few years ago.

As much as I understand that cultural norms around work are different in France, I understand even more the fiscal reality of what happens when you consistently pay out more money into a system than you accrue. It is not sustainable and something needs to be done to contain costs. Fitch Ratings found that raising the retirement age would create annual gross savings of EUR17.7 billion by 2030, or 0.6 percent of the GDP. 

Aside from fiscal reality, there is demographic reality. People in France are living longer with an average age of 85 for women and 79 for men (see below). France has a birth rate of 1.8, which is below the replacement rate of 2.1. Without a solution of actual reform, an overburdened system will eventually become insolvent. 

Source: Institut Nationale d'Études Démographiques (INED)

If your goal is to provide a pension system for your retirees to live on, then there has to be a way for it to last in the long-run. Increasing taxes in a country that already has such high tax rates will only make it more difficult to sustain its social security program and other government services. Much like I explained in 2013 when I argued for raising the retirement age for Social Security in the United States, raising the retirement age is that compromise one has to make in order for long-term solvency. People working longer not only means retirees withdrawing payments for as long, but it also means more people contributing to the system. Since both France and the United States have pay-as-you-go systems for their retirement accounts, I would surmise that France's issues are a canary in the mine for the solvency issues facing the United States with Social Security. While it is not a politically popular move, I at least give Macron kudos for having the balls to address an important issue that so few politicians in the United States are willing to tackle. 

President Macron Is Correct: France's Welfare Spending Is Out of Control

As a break from U.S. politics, I would like to look at the other side of the Atlantic and see what is going on in France. A couple of weeks ago, French President Emmanuel Macron made a controversial statement by referring to France's welfare spending as "pognon dingue" (literally translated as "crazy money," but can be translated "an insane amount [of money]"). His statement that France's welfare spending is out of control has caused much rancor in French politics. Let's examine some statistics.

Looking at government expenditures more generally, statistics from the Organization for Economic Co-Operation and Development (OECD) show that France ranks the second highest in terms of percent of GDP. The only country that outranks France is Finland. Nevertheless, we have to remember that Macron's comments were specific to welfare spending.

Looking at social expenditure statistics from the OECD, France has 31.5 percent of its GDP going to welfare spending as of 2016. This is the highest percent of GDP out of all of the OECD countries. When looking back to 1980, which is when OECD started tracking these figures, France was only at 20.1 percent. This means between that France's welfare spending increased by more than 50 percent since 1980! The French government just released a report last Thursday on social spending in France. Included in the report was the tidbit that in 1959, social spending was less than 15 percent of GDP. Now it is at 31.5 percent, which is more than double what it was about a half-century ago.

Source: Direction de la recherche, des études, de l'évaluation, et des statistiques (DREES)

From a historical perspective, we see that France has had increasing problems with its social spending. What about looking forward? In May 2018, Moody's changed its outlook on France's credit rating from stable to positive because the Macron administration vowed to cut government expenditures. Moody's also stated in May 2018 that its high levels of government spending was weighing on its overall competitiveness. Moody's is not the only one to view France's spending habits disparagingly. The International Monetary Fund (IMF) identifies France's social spending as a major driver of its high budget deficits and its forced tax increases (IMF, Article IV, 2017, p. 6). The IMF goes as far to say that government spending is at the heart of France's fiscal problems (ibid., p. 9)!

Source: IMF, p. 13

I would hardly classify the IMF as capitalist or Right-leaning, and even the IMF concludes that "it will be critical to design and lock in deep spending reforms at all levels of government (ibid., p. 14)." This is the IMF, a well-respected institution within the policy world, making us aware of just how bad France's welfare spending is, and how it needs to be curtailed.  The narrative about Macron's comments did not incite a conversation from much of French media on how to decrease increasingly unsustainable debt; the coverage was largely about how offensive Macron's comments were. What should scare us about this response even more is that Macron did not propose what he would like to reform or cut. All he did was accurately state that the spending is out of control. Addressing a simple fact has the French world, particularly the French Left, in a frenzy. If much of the French world is oblivious to this basic of realities, I would hate to see what is in store for France's fiscal future.

Foie Gras Ban in the United States: Oui ou Non?

You know you are a public policy nerd when you read an amicus curiae brief for fun. That is what I caught myself doing recently. A few weeks ago, libertarian organizations Cato Institute and the Reason Foundation filed an amicus curiae brief regarding a foie gras ban. Foie gras is a luxury food made from the fattened liver of a duck or a goose.  To have these livers fattened, these birds are force-fed a mixture of fat and grain in a process known as gavage. The basis for the ban is that the force-feeding is inherently cruel (see PETA website for opponents' arguments).

Much like fish do not have the same neurological capacity to feel pain as humans do (e.g., Rose et al., 2012), I have to wonder if geese feel the pain of a tube down its throat. Vis-à-vis an argument of analogy, we anthropomorphize the pain because we think to ourselves, "Pushing a tube and shoving food down my throat sounds tortuous, so it must be the case for a goose or duck." But let's take the duck's anatomy for a second. Birds have gizzards, which give them the ability to digest stones and other hard materials. Ducks have been known to swallow whole fishes. Ducks also lack a gag reflex, thereby diminishing the argument that ducks are uncomfortable during gavage. The gavage takes places at the end of the fowl's life, and usually last 2-3 weeks (which is relatively short in comparison to the lifespan). Couple that with the fact that at least in the United States, the animals for foie gras production are treated better relative to other animals in agricultural production.

Setting aside biological facts for a moment, what does research say on the topic? The most thorough report on the topic comes from a 1998 meta-study completed by the European Scientific Commission (ESC). On the one hand, the report found that the gut capacity is adequate to handle gavage. The report also found that the effects were reversible in four weeks, thereby implying a lack of long-term damage. The overall evidence of injury was "small." Conversely, the same ESC report found a higher mortality rate, and that such fowl were impaired as a result of the gavage. The report also concluded that the "resulting fat liver is of no commercial value." In short, the ESC report had vindicating and damning parts. There is some other evidence suggesting a lack of pain (e.g., Guémené et al., 2006) and some suggesting more pain (Ma, 2013), more research is required to make a more determinable conclusion (Skippon, 2013).

There is the philosophical argument on animals' rights: Should we treat animals as equals to humans, as mere property of human beings, or have a legal quasi-qualification that affords animals some protections under the law? Animal rights activists argue one way, foie gras producers another. In the United States, France, and other countries where they produce foie gras, animals are afforded less rights than humans. There is a balance between animal rights and the individual human being's consumption choices, and it is difficult for society to figure out where to draw the line.

The problem with such a normative argument is that it comes down to "I personally don't like that." The logic used by foie gras opponents could be used to ban all factory farming or even all meat production, as the aforementioned amicus curiae argues. Yes, this is technically a slippery slope argument, but at the same time, animal rights activists would most probably not stop if they were able to enact a nationwide ban on foie gras. Fortunately, there is no notable legislative push to further ban production of animal products because freedom to eat whatever animals they want is preserved.

Aside from the food freedom argument and the argument that the ducks do not feel the amount of pain that animal activists purport, foie gras is a delicacy. More to the point, foie gras is not consumed at the same rate in the United States as it is a country such as France. In 2012, U.S. per capita consumption was 0.003 pounds. To put this number into perspective, the average American eats on average about 100 times the amount of buffalo meat. I'm not a fan of government bans because they are blunt instruments that often have unintended consequences. The prohibition of alcohol was so terrible that Congress had to appeal the 18th Amendment with the 21st Amendment, which is no easy feat given the constitutional amendment procedure. Prohibition of marijuana has also come with a heavy price. The thing here is that I don't expect a foie gras ban to have the same effect because foie gras does not have the same pervasiveness as alcohol. With only three foie gras production farms in this country, it is the lack of foie gras in this country that makes me wonder why we're bothering in the first place. It is probably because of that lack of demand that animal rights activists are grabbing at that low-hanging fruit. I don't mind a call for more humane practices in the foie gras industry, but when you look at biology, a lack of evidence, and market demand, I don't see why we need to take a further step to quash food freedom to placate animal rights activists.

Should There Be a Catalonian Nation Independent of Spain?: The Ramifications of Secession

Barcelona is a beautiful city known for its art and architecture. It is a city I would like to visit some day because it truly is a gem of Spain. Being located in the Spanish province of Catalonia (Cataluña), it is also in the middle of a political controversy. On October 1, the Catalonian people are to vote on whether or not Catalonia is to secede from Spain. The complication is that the Spanish government has declared the referendum for independence to be illegal. Catalonian independence dates back to the early 20th century when the Spanish government revived the Generalitat of Catalonia in 1932. This increased autonomy was quashed with the rise of dictator Francisco Franco. After Franco's death in 1975, the Catalonians focused on increased autonomy instead of an independent state. This changed in 2007 as a result of a fallout from the Great Recession. The main gripe: Catalonia has been paying more in taxes than it had been receiving in benefits. In a time where Brexit is taking place, it makes me wonder if Catalonia should secede. I do not want to get into whether or not Catalonia should hold a referendum. That is separate from the question I would like to answer: "Is it a good idea for Catalonia to separate from Spain and become its own country?" I asked a similar question three years ago when Scotland was looking to secede from the United Kingdom, and I will apply that general research methodology here to the Catalonian case study.

Economic Costs
Economics will play an important enough in the outcome of this election. The economic argument being used in support of Catalonian independence, which is being contested by some, is that it pays more in taxes than it does in expenditures, thereby creating a deficit. Catalonia receives 10 percent of federal funds while accounting for 16 percent of the Spanish population. Based on this cash-flow method, Catalonia is losing the equivalent of 8.5 percent of its GDP per annum, which is notable when its current debt-to-GDP ratio is 35.4 percent. Even if this money were to stay in Catalonia, there are multiple costs to the Catalonian economy, the first being that the services that the national government provide would have to be provided by the autonomous Catalonian government. This could very well reduce the benefits from 8.5 percent of the GDP to 4.2 percent, although the Generalitat of Catalunya estimates a rosier 5.8 percent (also see less rosier projections from the Societat Civil Catalana here).

Having an extra 4.2 or 5.8 percent of the GDP sounds like a nice win. However, this assumes that economic commerce resumes as normal after the secession. The big reason for that is because secession automatically means that Catalonia is ejected from the European Union. 65 percent of Catalonian exports are bought by the European Union. This is important because the European Union is a trade bloc. Being removed from that means paying tariffs, which diminishes the benefit of secession.

Much of that EU trade is with Spain: Catalonia conducts about half of its trade with Spain. Yes, France is Catalonia's largest exporter, but after that, Catalonia's biggest exporters are Andalucía, Aragón, and Valencia. Also, let us keep in mind that while Catalonia technically has a trade surplus, much of that surplus is with Spain. With the rest of the world, it runs a trade deficit of about 4 percent.

Considering that the Spanish government is already attempting to quash the referendum vote, it is unlikely that Spain is going play nice with Catalonia in the event of a secession. Spain's Economic Minister, Luis de Guindos, warns that Catalonia's GDP could drop by 30 percent. Why? There is great uncertainty as to how this will play out. The uncertainty would cause Catalonian households to consume less, which would damper the economy. When the costs and benefits are added up, a study from the University of Edinburgh actually found that disposable income would diminish by 3 percent (Comerford et al., 2014). There will most certainly be disinvestment and increased unemployment, both of which would diminish Catalonia's return. The reason for disinvestment is because many of the Catalonian businesses would prefer to stay in the Euro Zone, and would probably relocate to Spain.

Membership with the EU is not just about trade policy, but also monetary policy. Once Catalonia leaves, it would no longer be part of the Euro Zone. Sure, it could de facto use the euro, but it would be a country without a currency and have zero control over monetary policy. Its inability to receive financing from the European Central Bank (or Spain) would lead it to creating its own central bank and currency. Without an institutional history, its currency would probably be weak and its interest rates would be high.

Other Considerations

• According to a survey from Deloitte surveying business owners throughout Spain, 74 percent of Spanish business owners think independence will hurt the Spanish economy. 43 percent of Catalonian business owners feel the same way.
• Pluralism is one of those highly esteemed values, especially in a more democratic society. We get along with those around us in spite of our differences. Yes, the Catalonians have a distinct language with their own history and culture, but Catalonia somehow managed to maintain their heritage for over 400 years under the Spanish crown, as well as Franco's attempts to suppress Catalonian heritage. 
• While it is admittedly easier to maintain more homogenous countries, many developed countries have maintained multilingual nations, including Canada, Israel, India, and Switzerland, not to mention other countries that can harmoniously deal with a multicultural society. 
• The end-result of a secession greatly depends on the reaction of the country from which the separation is taking place. Catalonian separatists do not have the capacity or desperation to take on the Spanish army. Let's remember that in the not-so-distant past, the Spanish government was run by a far-Right Francoist military junta. Considering how important Catalonia is to Spain, the Spanish government using military might to quash the secession should not be dismissed outright. 
• Catalonian independence has other militaristic ramifications. If Catalonia leaves Spain, it loses protection under NATO, and there would be no guarantee that Catalonia would be offered protection under NATO. 
• According to Spanish think-tank Fundación Alternativas, this does not just affect its status with NATO. Independence also adversely affects its status with the United Nations, European Union, the International Monetary Fund (IMF), and the World Bank. Specifically with regards to the European Union, Catalonia could not get into the European Union without Spain's help because entry into the EU requires a unanimous vote.
• Per a 2012 European Commission report on regional governance, Spain ranked 13 out of 27 EU countries. More to the point, Catalonia ranked 130 out of 199 regions, and was the lowest-ranking Spanish region. The fact that corruption is more pervasive in Catalonia than it is throughout the rest of Spain indicates that the government would have a harder time performing and that the economy would not grow as well as anticipated. 

Conclusion: While Catalonia has a large and diverse enough of an economy to theoretically support its own statehood, the current dynamics would render a hypothetical secession a disaster both for Catalonia and Spain. Reforming the Spanish federal fiscal regime would be a much more prudent move than Catalonia leaving Spain. The people should be allowed to decide their own fate, but I nevertheless contend that the people of Catalonia should remain as a part of Spain.

A French Case Study on How Rigid Employment Protection Laws and Unionism Stifle Labor Market Growth

Emmanuel Macron was elected President of France last month, and already I knew that his work was cut out for him. Between economic stagnation, immigration, unemployment, defense, and a host of issues, Macron will not be bored during his tenure. Another issue that Macron is already facing is trade unions. During the French election, Macron made labor market reform a key proponent of his pro-business election platform. Macron was not sworn into office all that long ago, and the trade unions are ready to face Macron because of his pursuit of labor regulation reform. Macron is already being urged by trade unions to slow down labor market reforms. Macron sees labor market reform as an opportunity to bring more flexibility to a byzantine set of labor laws (le Code du Travail), while there are those on the Left who view its as protecting Big Business while giving workers the shaft. When analyzing the dynamics of labor market regulations in France, we should ask ourselves what sort of effects the regulations have and whether it is worthwhile keeping such rigidity.

Le Code du Travail, which is France's 2,000-plus page corpus of labor laws, has been around since the late nineteenth century. With that many pages of rules and regulations, it is not practical to cover everything today. However, there are some key points about the French labor market that can be covered that can nevertheless paint the picture of the state of France's labor market. For one, the Index of Economic Freedom (see here) points out how France's labor regulations lower its economic freedom. The Fraser Institute has similar results with its economic freedom index. Although France's scores on Fraser's index are higher than they used to be, France's score on regulations (and labor regulations in particular) lower its overall score on Fraser's index.

There are a number of labor laws that constrict labor market growth: mandated vacation time, the 35-hour work week, a high minimum wage, the list goes on. A major example that illustrates the ineptitude of the French labor market is what happens when a firm hires fifty employees. Once an employer exceeds 49 employees, businesses are hit with many regulations, including having to create a work council (comité d'enterprise), establish a Health and Safety committee, reporting more detailed statistics to the Labor Ministry, appoint a union representative, and new regulations making it more difficult to lay off or fire workers. A 2016 paper from The London School of Economics (Garicano et al., 2016) shows how French companies get around all the rules applying to companies with 50 or more employees: hire up to 49 employees. This is significant since the same LSE paper (see below) found that larger factories in France have had higher productivity rates than the smaller ones (Garciano et al., p. 33). Another way of framing this quandary is that France is not being as productive because of the labor rigidity.

What ends up being paradoxical is that labor productivity in France is nearly as high as it is in the United States (see below), not to mention that France has one of the highest GDPs in the world and has a good standard of living. If you notice the metric the OECD uses for labor productivity, it is GDP per hour worked. That means the metric filters out anyone who is not working. Sure, for those who are working, they're doing great. But what about the rest who are not?

As this Cato Institute article points out, just because France does have a relatively high standard of living doesn't mean that France's economy is doing well. One of the drawbacks of the French labor regulations is that France has a higher-than-average unemployment (see below). As the OECD Index of Employer Protection, it is more difficult to fire someone in France than it is in the United States. If France were able to hire more people, it might be that the labor productivity per employee drops a bit. But at least more French people would be working, and that overall economic output increases. The Left-leaning International Labor Organization is hardly capitalist, but nevertheless concedes that short-term jobs are a feature of stringent employment projections (Le Barbanchon and Malherbert, 2013, p. 20). Furthermore, a paper by three French economists shows that any country with high employment protections would benefit from lowering those protections by increasing [low-skilled] employment (Cette et al., 2016).

What would it look like if France relaxed its labor laws and employee protections? A panel of some of the foremost expert economists in Europe were asked last month about whether liberalizing France's labor markets by reducing employment protections and decentralizing union power would improve the French economy. Two thirds answered that it would improve France's economy. About the same percent also agreed that reducing employment protections would translate into reduced unemployment. Most of those who did not agree were unsure. Why? They thought that the short-term might be problematic because overmanned firms might go to the wayside. That being said, when you remove the economists who were unsure, the ratio between those who thought it would help versus those who didn't was even more pronounced. Most economists agree that France's labor laws are too stringent, and that France would benefit from a more liberalized labor market.

France provides a good example of what happens when labor regulations run amok. Even so, one can argue that France is just one country, one case study. After all, comparative politics reminds us that each country has its own unique set of circumstance, and that multiple phenomena simultaneously interact to create different results. On the other hand, the basics of comparative politics gives us the ability of analyzing cross-country data and phenomenon while reminding us that each country has its own unique dynamics. Even if France's dynamics are not identical to those of the United States or other countries, we can still draw some conclusions.

When regulations make more it difficult for businesses to hire, fire, and retain employees, it is more difficult for economic progress to take place. It is more difficult for people to have a livelihood. Minimum wage causes greater unemployment. As we experience in the United States, extending overtime laws makes hiring more expensive. An IMF paper shows how German employment improved when Germany significantly reduced labor regulations in the 2000s (Detragiache et al., 2015). We can go through country by country, but both economic theory and empirical evidence point to the same thing: more liberalization of the labor market is better. The unions in France will surely push back, but when all is said and done, France will benefit from less labor market rigidity.

Is There a Certain Futility to Pursuing Multiculturalism?

"Can't we all just get along?" The world would be a better place if everyone pursued peace and emphasized their similarities over their differences, but all the wars, conflicts, and ethnic nationalism and chauvinism throughout history show otherwise. Being more multicultural, whether in public policy, business protocol, or in our personal lives, has become more and more prevalent over the past century. I recently came across an article at the Council on Foreign Relations talking about the failures of multiculturalism. According to author Kenan Malik, "everywhere, the overarching consequences have been the same: fragmented societies, alienated minorities, and resentful citizens." Although most of what I am going to write here is just a stream of consciousness [that could very well use some fine-tuning down the road], it's going to be revolving around two questions: 1) Has multiculturalism been that much of a failure? 2) Is there a point in even pursuing multiculturalism?

The term "multiculturalism" can be quite nuanced. It can be as simple as the co-existence of individuals of diverse cultures within a given society, which is a good thing because a free society needs to be one in which can tolerate others' differences. The definition can be as complicated as various public policies that encourage a more ethnically and racially diverse society, such as immigration or labor policy. Governmental approaches to multiculturalism can vary, as Malik points out. The United Kingdom gives various ethnic communities an equal opportunity to participate in the political process. Germany encourages immigrants to live their separate lives without even pursuing citizenship or even attempting to integrate. France simply prefers assimilationist policies over multicultural ones because France has a strong sense of nationalism. The United States has a more open, integrative approach to multiculturalism, although if you look at its immigration history, it took a while to get there.

Having a multicultural frame of mind assumes that an individual's cultural background has the potential to frame one's identity and path. There is something to be said for someone to maintain a sense of cultural identity. Although not quite the same, I maintain my Jewish identity while being able to maintain my identity as a citizen of the United States of America. To be an American simply means to be a citizen of the USA, whether by being born here or going through the naturalization process. In France, the standards are much higher. You pretty much have to have Christian, French ancestry dating back centuries. Otherwise, you're not considered "truly French." Jews who have French ancestry aren't considered truly French, so why would Muslim émigrés? Regardless of the extent of nationalism in a country, nation-states have at least some cohesive element that forms a common identity, which is inevitable when people interact with one another in a society, particularly a nation-state.

Societal definitions of nationalism are also tied into the extent to which far-Right, anti-immigrant parties have clout in a given country. Ultra-nationalism never did any favors for pluralism, that much I can tell you. Race and religion play a role, but so does language. If you cannot speak the language, you already have a barrier to fully participating in society. Economic disparities and willingness to participate in society affect an immigrant's ability to integrate.

Also, there is a difference between integrate and assimilate. Assimilate means shedding one's previous culture in order to take on the culture of the country in which one currently resides. Integrate means maintaining some or all aspects of one's culture while still finding a way to function and participate in society. If you separate your immigrant or minority population, such as in Germany or Britain, then there is discontent and discord. For society to work at its most optimal, these individuals need to be integrated into society so they can be active members of society.

A big issue with multiculturalism is the assumption that all cultures are equally valid, which leads to cultural relativism. This is a problem when certain cultures thrive on intolerance or likes to infringe on others' lives. How could we object to honor killings, anti-Semitism, infant sacrifice if we went down the multiculturaist viewpoint? Plus, multiculturalism quashes individualism. Chinese culture, for instance, isn't monolithic. Europeans aren't all the same. Even within a certain nationality or group of people (e.g., women, homosexuals, libertarians, Jews) don't all think the same way.

I don't think having a pluralistic society in which individuals of different races, religions, sexual orientations, political views, and genders is a bad idea. It's actually a great idea. Diversity helps advance society. However, when certain government policies get in the way and pushes a view that all cultures and views are equally valid, I have a problem of that. That should take place in the marketplace of ideas, not be forced by government decree. You can try to legislate tolerance, but acceptance, that's a whole different issue, and you know what? Multiculturalism tends to breed even more resentment. Pluralism breeds goodwill. I know it's not politically correct to say that, but someone has to point out yet another example of "good intentions, bad results."

Defending Freedom of Press in France and Everywhere From Extremists and Prudes

France has suffered a coup as it mourns those lost in the Charlie Hebdo terrorist attack that just took place. For those who don't know, Charlie Hebdo is a Left-leaning, anti-religious satirical newsletter that did an above average job of making fun of idiocy across the board. Apparently, some Muslims didn't find their satire so humorous because a group of them grabbed some Kalashnikovs, attacked the office of Charlie Hebdo, and ran away screaming الله اكبر (literally meaning "G-d is the greatest," but in this case, was used as an Islamic battlecry). Ten journalist and cartoonists, as well as a couple of police officers, were assassinated in the attack. It was the worst terrorist attack in France since the 1960s.

If you look at some of their cartoons, yes, I can see how they can be insulting or irreverent. I mean, look at this cartoon below of a Jew and a Nazi kissing, and it says "Judeo-Nazism: Love is stronger than hate."

Can you see how this would anger more than a few Jews, and how it can be perceived as anti-Semitism? I do. It infuriates me to no end that someone would be that insensitive. However, do you see Jews going out and assassinating the cartoonists simply because they find it insulting? Nope. There is only one religion whose practitioners will go out and kill someone because they can't take a joke: Islam. Why is it that there is not a single imam of clout that speaks out against such depravity? The better response to insulting cartoons is a non-violent one (e.g., boycotting) and to call a spade a spade, much like with the "Death of Klinghoffer" controversy a few months back.

I'm not going to be the least bit surprised if someone blames the attack on Islamophobia. To suggest that the satire brought about the attack is similar to blaming a woman for being raped because she was scantily clad. It's not the fault of Charlie Hebdo; it's the fault of the perpetrators who decided to murder in the name of Islam. It is attacks such as these that perpetuate stereotypes of Islam. If you want people to stop having negative views about Islam, Muslims in developed nations should use their freedom of speech to speak out against these depravities.

And it's not just Muslims who should use their free speech to speak against such immorality. We should double down and continue to use our freedoms of speech and press. We shouldn't be afraid to use our freedom of speech just because some religious extremists are offended. If we do become afraid, then anti-intellectual, ignorant ignoramuses who like to censor free thought win. In a free society, freedom of press needs to prevail, especially since it "contributes to good government, self empowerment, and eradicating poverty." Without it, we become slaves to fear and authoritarian prudes who lack a sense of humor they sorely need.

Aujourd'hui, nous sommes tous français.

Would Boycotting the L.A. Clippers Have Taught the NBA a Lesson?: Why Boycotts Rarely Work

There has been plenty of hullabaloo lately around the racist remarks of former Los Angeles Clippers owner Donald Sterling. Magic Johnson thought it would have been a great idea to boycott the L.A. Clippers to teach the lesson that racism is unacceptable in a civilized society. However, the threat of a boycott was allegedly averted because the NBA fined Sterling, as well as placed a lifetime ban. While the outrage towards Sterling's racist comments is perfectly justifiable, the question I have to ask is whether a boycott would have actually done harm.

Boycotts are nothing new. People have collectively and voluntarily abstained from economic commerce with a certain company, country, or other entity to make a political or social statement. The idea is that if one can amass enough support for a boycott, it can adversely affect the bottom line and send the message that certain behavior or beliefs are unacceptable.

Let's take a look at some of the academic work on the topic. A couple of economists showed that the American boycott on French wine because of France's opposition of the Iraq War actually succeeded (Chavis and Leslie, 2006). Other economists have shown that either the threat of boycotts nor boycotts themselves inflict noticeable economic damage on the boycotted entity (Koku, 2012; Koku et al., 1997).

Even with conflicting scholarly works, I'm still unconvinced that a boycott on the Clippers would have worked. If one decides to boycott a country, at least the country has enough economic commerce where it can withstand that sort of pressure. In spite of the attempts of certain countries boycotting Israel, Israel's economy is doing just fine (Congressional Research Service, 2013, p. 3). Companies don't have the luxury of having entire national economies to bolster their revenues. Even so, companies typically have enough insulation to make it through. The L.A. Clippers are worth $575M [as of 2/2014] and bring in $128M in ticket revenues per annum.

For a boycott to work, you need to have a targeted, massive enough of a collective to impact the revenues. Then there is the temporal factor. Even if the Clippers had a bad year in term of its revenue, the boycott would need to last long enough to run the entity out of business.  Most boycotts don't have the longevity to make an impact, presumedly because many people have short attention spans and simply move on to the next thing. Finding a sufficient amount of people who can show the zeal to boycott long enough is highly improbable to affect the bottom line. However, the threat of a boycott or the perception that it works seems to do more harm to one's reputation than anything else (King, 2011). If boycotts succeed in anything, it is a boycott's ability in reaching a compromise solution, which would explain why the NBA replied by fining and banning Sterling in lieu of any actual boycott.

France's Debt Is Bad Enough Where the EU Is Chiding France

I don't exactly have the highest threshold of dealing with government's fiscal irresponsibility, but for whatever reason, France seems to grab my attention. Is it as bad as Greece? No. But still, France does a bang-up job. Although France has a history of having a solid credit rating, its credit rating downgrades (most recently from Standard and Poor's) signals that something is amiss. Economic trends must be pointing in an even more downward direction if I end up reading in the Financial Times earlier this week how France is in violation of European Union budget rules because France cannot keep its budget deficits below 3 percent (Ministères de Finances et de l'Économie, 2014, p. 17). The French government is now in a quandary of figuring out how it can reduce its budget deficits without greatly agitating its citizenry. It might be tempting to blame this on the recession. After all, it is why these budgetary rules were implemented in the first place. Looking at France's GDP growth in recent years shows that its tepid GDP growth was an issue even before the recession.

What France needs to do to deal with debt sustainability in the medium-to-long run versus what they will do to keep the European Union placated will be two different things. This is not simply a matter of politicians, regardless of the country, who like to delay major fiscal reform as much as possible. France was the country that had its laborers strike in an uproar a few years back because the government was going to raise the age for retirement benefits from 60 to 62 years. What's more is that GDP projections back in 2012 were a lot more rosy than the current situation (Ministères de Finances et de l'Économie, 2012, p. 3). I expect a minimalist compliance with the European Union so that the bureaucrats get off France's case. As to what they should do, that's a whole different story.

I found a report by Balázs Égert over at the Organization of Economic Cooperation and Development (OECD) covering the topic of how France should reduce its debt. For those who know, the OECD is hardly a bastion of laissez-faire thought. Even so, I was surprised at how much they were concerned about France's unsustainable debt to the point where they were suggesting forms of fiscal consolidation. The major suggestions for public debt consolidation were in the arenas of the public pension system and the health care system, which is no surprise because they tend to be major drivers of federal budgets. The French government also has a reputation of being very liberal with worker benefits, which means that if France has an aging population issue (like the OECD report states), then the French government is going to need to reform labor laws so that benefits are not so generous, and so that French citizens are incentivized to work more hours and retire at a later time.

There is also the matter of dealing with France's tax rates, which are high. Although François Hollande recently claimed to be a supply-sider, I worry because France suffers under a delusion, a delusion in which one puts faith in what the people over at the American Enterprise Institute facetiously call the Krugman Curve, or the idea that an increase in the marginal tax rate translates into more tax revenue. If that were the case, the French government would have an enormous tax base because France's propensity to tax is staggering. France has one of the highest rates of tax revenue as a percentage of GDP in the European Union, as well as one of the highest rates of government spending as a percentage of GDP, both of which are problematic because it signals that France has to rely on its tax base and aggrandized government to drive the GDP (Hint: That's not how you get real economic productivity).

Without the conversation being too tangential (since we can delve into each sector and go into detail as to specifically what France can do to reduce its deficits), I suppose the point of the article is that if France is going to seriously reform its economy, it needs to tackle the more systemic issues. Its rates of taxation are too large, as is the state, neither of which can maintain solvency in the long-run. Anything short of market liberalization and cutting the excessively lavish social-welfare programs will only perpetuate France's debt sustainability issues.

Why France Deserved the Credit Rating Downgrade from Standard & Poor's

France took another coup as its credit rating from Standard and Poor's (S&P) was downgraded to AA status. I read S&P's report that outlined its decision to downgrade, and I found it to be good reading, although not everyone might agree with that opinion. Paul Krugman had a fit about this report yesterday because Krugman believes that the idea of France's downgrade being based on the notion of needing to cut back on taxes or deregulation is ludicrous. Krugman is just throwing a hissy fit because France is just another example of how high taxes, high levels of government spending, and onerous regulations translate into an anemic economy, but more on that in a moment.

Remember that Fitch downgraded France's credit rating this past July (see the credit rating report), and Moody's did so last November (see credit rating report here). A few days before Moody's decided on its downgrade last year, I performed my own mini-analysis on France's credit rating, focusing on levels of government spending, taxation, and labor rigidities. Additionally, reports from the European Commission, the OECD (this OECD report goes into how France can reinforce competition with labor reforms), and even the French government do not paint the rosiest picture of France's financial situation. Looking at this issue a year later, especially in light of another credit rating downgrade, is most interesting and makes me ask the question of what has triggered all these credit rating downgrades.

France's government spending is not any more inspiring than it was when I looked at it last year. Much like with the case in Britain, Krugman does not have an understanding of what austerity really is because if there were austerity, there would be some actual evidence that austerity has taken place. As Veronique de Rugy, senior research fellow at the Mercatus Center, points out, government spending as a percent of GDP has remained well into the mid-fifties (Ministère de l'Économie et des Finances, p. 111). Last year, it 55.9%, and this year, it is 56.9%. Looking at the Eurostat statistics for government expenditures are not any better because government spending has not decreased at all. Since 2006, France's debt-to-GDP ratio increased from 63.7% to its current 90.2%. Once a debt-to-GDP ratio reaches three digits, it becomes very difficult to lower that ratio, which makes sense because increased, indiscriminate government spending means that the probability that the government can lower that ratio without resorting to expropriating property, high levels of taxation, or printing more money is very low. For a country whose debt-to-GDP ratio has no promise of decreasing, I'd ask Krugman to actually take a look at France's budget to see what unnecessary expenditures exist, but I don't think the term "budget cuts" exists in Krugman's vocabulary.

To lower the debt-to-GDP ratio, the government uses taxation to accrue more revenue. Even before reaching 100%, government tends to use taxation as a method to lower that ratio. Much to Krugman's dismay, taxing citizens into oblivion does not have the desired effects. Why? When taxation becomes a large percentage of the GDP, like we see with France (Ministère de l'Économie et des Finances, p. 61) having its taxation currently be at 45.0% of its GDP, not only does the dependency on taxation signal weak economic development, but taxation also adversely affects incentives to work, save, and take risks in business. Even the IMF recommends that the French government reduces spending over increasing taxation. A look at the World Bank's Doing Business Index, which measures how business regulations make it more difficult to do business, can give us some insight to this phenomenon. According to the index, France has actually gotten worse since last year. If it is more difficult to acquire a construction permit or hire an employee, it would explain why S&P predicts France's unemployment rate will remain in the double digits until 2016, and why real GDP growth has been at zero for the past couple of years.

Fortunately for France, it is not doing as bad as Italy or Greece. As S&P states in its credit rating report, France absolute high levels of productive and wealth, high diversification, financial sector stability, a well-educated workforce, and political stability. S&P is not predicting further instability in France, but recovering its previous credit rating doesn't look all that hopeful, either. Without decreasing its levels of taxation and government spending, France can never become the economic powerhouse that it once was.

How Is France's Credit Risk Looking Right Now?

Rather than focus on the election results like everyone else has been doing since Tuesday evening, I wanted to write about something with an international theme. Today, I would like to focus on France's economy and assess their long-term risk in the financial markets. The importance of France is due to the fact that its nominal GDP is fifth worldwide and second to Germany in the Euro Zone. Although France is not the power it once was under Napoleon, France still has influence in the global markets. If the French economy was dealt a coup, it would affect the Euro Zone, at the very least, and at the most, would adversely affect the global economy. With that to consider, let's take a look a France.

On the whole, France is a country with sound, democratic institutions. Freedom House has given France a superior ranking on its index that measures political and civil freedoms. Even with some issues such as Internet censorship and the burqa ban, France enjoys overall institutional stability, which is great because France's resilience to external shocks and a seemingly stable monetary policy [with the ECB] helps set the minds of investors at ease because instability leads to a more inefficient use of resources. This sentiment is additionally affirmed with France's reasonably high rating on the Corruption Perceptions Index (CPI) or France's overall inflation rate. Even when looking at the credit-default swaps market, France's government bonds hold comparably well to Germany (as of date, 80.05 versus 32.50, respectively), which is a solid indicator of confidence in the French government.

My confidence wanes a bit when I look at the economic freedom indexes from Heritage/Wall Street Journal and the Fraser Institute, not to mention France's anemic GDP growth. I would summarize France's economic issues into three main issues:

1. Government spending. France's debt to GDP ratio shot up six percent points during the last two quarters. Currently, France's debt to GDP ratio is at 91%, which is above the Euro Zone average. The increase of government spending is problematic because it signals a lower probability that a country can pay off its debt obligations without doing things like printing more money to create a de facto default, expropriate more property, or raise taxes. Also, if the citizenry demands, or the government continues to provide more welfare-based services, then the amount of government spending will only ascend to insolvent rates. 
2. Tax Rates. In order to be able to supplement a welfare state, a country needs to tax higher. When looking at the OECD database for tax rates, the value-added tax (VAT) sits at 19.6%, which is above average. Tax revenue as a percent of GDP is 44.2%, which is bothersome because it suggests a lack of financial depth brings brings up issues mentioned in my first point. François Hollande recently unveiled his intent to tax those making more than a million euros at an astonishing 75%. France's above average tax rates are problematic because such levels of taxation greatly diminish, if not outright destroy, incentives to save, invest, or even work.
3. Labor Rigidities. As if France's fiscal policy wasn't bad enough, there is one last issue that makes the French markets even more problematic: its labor markets. Looking at the Index for Doing Business compiled by the International Finance Corporation and the World Bank, it is not easy to do business in France. Why is that? For one, France's labor laws are based off of Le code du travail, which was first established in 1910 (i.e., their ways of perceiving the labor markets are arcane and obsolete, to say the least). It is impossible to fire an employee at will. Back in 2006, France tried to pass a bill that stated that an employer could fire an employee under 26 years of age if he didn't work out. The result? The bill got rejected. One has to fill out all the proper paperwork immaculately and jump through all of the proper loopholes to get someone fired. It is usually cheaper to keep an incompetent employee on the job than firing him and hiring a new employer. This causes employers in France a huge disincentive to hire new labor, which would explain why it had high unemployment rates even prior to the recession. Not only that, hiring is expensive. France mandates a thirty-five hour work week, which is the lowest amongst developed nations. The French government also mandates that employers give eight weeks of paid vacation. France also has this crazy law where if you hire a 50th employee, there is a ridiculous amount of oversight and bureaucratic intervention. Since the marginal cost to hire a 50th employee is so high, France has a lot of 49-employee companies, and thus would have to endure the cost of creating a new company to get around the loophole. Without a flexible labor market, not only have you made it undesirable to hire more employees, but productivity goes downwards because complying with all these regulations creates inefficiencies in which the money could have been better allocated elsewhere. 

Conclusion: The extent of credit risk is largely, but not solely, contingent upon the future of the Euro Zone. If Greece or Italy tank, there is a good chance of the contagion effect. Euro Zone notwithstanding, there are still internal worries for France. Remember that the French government couldn't fathom the idea that it could lose its AAA+ credit rating, but it did within the past year. Making the recent decision to increase the VAT didn't help, either. The International Monetary Fund (IMF) recently put out a report telling France that, amongst other things, it needs to reform its labor markets if it doesn't want to exacerbate its current situation. I agree with the IMF: it needs to make serious changes to free up its markets. Since there is currently a socialist as the president, that only increases the credit risk because socialism is just a form of credit risk. I do hope that France decides to make some real reforms in order to maintain its institutional stability, but again, optimism is not an indicator of how France's long-term economic status will turn out. Since I do worry about France's economic policies being "on auto-pilot" or worse (i.e., more socialist policies), I would currently have to rank France's overall credit risk somewhere between Low and Medium.

UPDATE, 11/15: The Economist just published an article about France's heightened credit risk. Worth the read.

J'en ai assez avec les jérémiades!

This was enough to make me scream «Suffit!»  The French are "up in arms" because they raised the age for retirement benefits from 60 to 62.  I kid you not!  They are putting the estimate of the number of Frenchmen that protested at 2.5 million.  This is the part where I don't know whether I should laugh or cry.  Now don't get me wrong.  I'm a Francophone who loves the French language, I read French literature, and I even enjoy French culture.  However, when you whine like this, it's no wonder that many Americans think of Frenchmen as connards who can't help but be feeble and sniveling. What was once a powerful colonizer with mass amounts of cultural influence has reduced itself to a bunch of socialist weaklings.  The perpetuation of this negative stereotype is so nauseating that I felt obligated to comment on such ludicrousness.

You know what? Americans cannot collect their Social Security until 62, albeit at a reduced rate, but you don't see us protesting en masse.  If the French went from a thirty-five hour work week to a forty hour work week or had their eight weeks of mandated vacation reduced in any way, shape, or form, they might riot like they did back in 2005. 

It's not the first time that the French have protested in such an unreasonable manner.  Back in 2006, there was an extremely controversial bill that caused a lot of protesting.  Guess what it was for?  It was a bill that stated that an employer could fire an employee that was under 26 and was within the first two years of their employee contract.  And would you believe it, the proposition got turned down due to mass protest.  Imagine giving a proprietor control over his business.  What audacity!

As strange as it is for the typical American, this mentalité française is the norm.  Let's think about why they have to raise the age in the first place.  Might it be because the welfare state is not as solvent as those on the Left would believe?  Maybe it's because the economic disparities between the countries within the European nation are causing economic upheaval and stagnation.  I'm going to go with both on that one.  If you think that this is bad now, wait until your precious entitlement programs go deep in the red because at that point, you'll most certainly be in for a rude awakening.

As the French would say, La vie est dure, pas de veine!