Stimulating The Public Sector, Suffocating the Private Sector: A French Dichotomy

Moody’s, when it stripped France off its AAA rating on Monday, had a laundry list of laments: “sustained loss of competitiveness,” “rigidities of its labor, goods, and service markets,” “deteriorating economic prospects,” uncertainties in the fiscal outlook, reduced ability to resist shocks emanating from the debt crisis….

A reflection of the granular details that have been seeping from every crack in France’s picturesque veneer: relentlessly rising unemployment, declining production and orders, collapsing automobile sales…. Everything seemed to go south. Home sales through August dropped 17%, mortgage originations plummeted 30.5% through September and 45.8% in October. OK, the “zero-rate mortgage,” a taxpayer funded program put in place by President Sarkozy’s conservative government to prop up home sales was drastically limited last November, austérité oblige. Down-payment requirements have jumped, and young buyers without a lot of cash have lost access to the housing market.

You’d think France is in a depression. Even its neighbor Germany is worried. Yet, third quarter GDP edged up by 0.2%, after a decline of 0.1% in the second quarter. Mere stagnation since the second quarter of 2011. What gives?

Spending by France’s central government makes up 56% of GDP. Regional and local governments also spend voluminous amounts on various services, construction projects, art installations, and other essentials. Combined, they make up a much larger portion of the French economy than the 56% of the central government alone.

In addition, the central government owns all or large chunks of important companies, even after nearly two decades of privatization efforts. For example, Renault was privatized in 1996, but the government still owns 15.7%. France Telecom was privatized in 1998, but the government still owns 27% and gets to appoint the CEO. Air France was privatized in 1999, but even after its merger with KLM, the government still owns 18.6% of the group. It still owns 84.4% of EDF, a mega-utility that owns all of France’s 58 active nuclear reactors, and 100% or SNCF, the national railroad with a quarter million employees.

The extent of government ownership determines how these companies react to the ups and downs of the economy. While it’s difficult for Air France to trim its staff, it has done so. But it is next to impossible for EDF or SNCF to do so. Political pressure simply wouldn’t allow it during times of high unemployment. So when the economy goes into a tailspin, these companies don’t react to the same extent that purely private companies do. It’s an old deal in France: they can count on the government for financial support and protection from competitors; in turn, they provide growth.

The bloodletting has been happening in the private sector. But with its relatively small footprint in the economy, its difficulties are not well showcased in GDP numbers, which are dominated by the massive and complex government apparatus and the enterprises it owns. With sufficient borrowing power and political will to run up deficits, that apparatus can essentially dictate economic growth, even if the private sector is struggling for air.

But the government—with an eye on what happened when bond buyers balked, as they did in Greece—is limiting increases in its outlays and is raising taxes. Hence, “austerity.” Well, in some areas. In other areas, it’s trying to solve economic shortcomings by law.

For example, youth unemployment. It now entraps 22% of all young people and over 45% of those without degrees. After exiting the educational system, only 60% find a job within three years; of those without degrees, only 30% do. For those in disadvantaged areas, such as the northern or eastern suburbs of Paris, the situation can border on the hopeless.

So Parliament voted to “create” 150,000 jobs for young people—100,000 in 2013, the rest in 2014. “Jobs of the future,” they’re called. €2.3 billion has been allocated. It has been tried before. It certainly helps some of the young unemployed. It might even start a few careers. But there are drawbacks. Many of these jobs won’t produce an economic benefit and might evaporate when funding dries up. Others might compete with businesses already in that space, putting further pressure on the private sector. Nevertheless, it might be one of the better ways to spend €2.3 billion—given the desperation of the young unemployed, and the social unrest they might cause.

It’s a classic example of French dirigisme, of government intervention in the economy. It benefits a select group of people. And it benefits the government that must show that it’s doing something. But it doesn’t address the underlying structural problems that are suffocating the private sector, and that are pushing it to shed jobs in the first place. The very problem Moody’s was pointing at.

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  6 comments for “Stimulating The Public Sector, Suffocating the Private Sector: A French Dichotomy

  1. Rik says:

    1. Looked a decade ago in French statistics. They simply looked crap, may be they improved or this one doesnot follow the general rule but somehow I doubt that. Makes no sense that France is doing almost as good(bad) as Germany looking at all the other evidence/data. Think we should be careful with these data, like with their forecasts but that is generally known.
    2. Going to a balanced system (imports=exports, structural deficit<growth+inflation+repayment'old'debt) will simply mean a much smaller state and considerably less welfare.
    But France also has the red tape they are control freaks which is especially bad for small and med size business.
    3. Plans for youth employment is a nice example. Imho the idea should be getting people to produce things that other people want to buy. The only sustainable way. But is looks simply like paying half of the group to dig a hole and the other half to fill it up again. Plus per 5 young 1 extra civil servant.
    4. Immigrants (non western variety) become a huge problem economically. Their youth is now half structurally unemployed (meaning a basket case for the government till they pass away and their children take over the basketcase 'job' (as there is hardly social mobility in that group)). This is the group that is supposed to bring up the unfunded pensions for the locals. You not only still have an aging demographis issue, but also an issue in quality of labourforce. Nobody is going to hire someone with hardly a formal education for French style wages. So iso of increasing the nett payers they have been increasing the nett receivers. Aka aging is even a bigger problem than on basis of demographics one would expect.


    "…dominated by the massive and complex government apparatus and the enterprises it owns. "

    You got that right, and it's all about Agenda 21 around the world.

    got property?


    One major reason why it's better that 'federal government' stick to it's original constitutional mandate and not take control of state's rights and responsibilities:

    One 'federal' dollar spent costs 10 times more than a similarly spent 'state' dollar simply because of the necessary added bureaucracy (agencies salaries, benefits and pensions, office complexes, information/documentations systems, vehicles, energy/maintenance costs, etc), also the more complex the bureaucracy the easier it is to siphon off or redirect money for ideological or corrupt purposes. This happens with every new 'federal' program. These expensive agencies produce nothing and generate no revenue. Now imagine what an international or 'world' dollar would need to cost you (your higher taxes -absolutely) to regulate 'you' and your private property by foreign national technocrats. Do we really want to hand USA sovereignty over to the UN to regulate the world and us?

    DEMOCRATS AGAINST U. N. AGENDA 21 – OK, So what is Agenda …

    Democrats to Stop Agenda 21. We are making common cause with others to end UN social engineering and communitarianism.


    QE3 -the Fed will be buying $40+ BILLION mortgage backed securities, current private property mortgages every month, open ended, until the government owns ALL mortgaged private property. Do you think the federal government will then not hand it over to the UN, like they did with ALL our water systems, parks and airports? For those that own outright their property; they will regulate, fee, tax and fine you, until you give it to them or they create a reason to confiscate it from you thru eminent domain or charging you with a crime, one way or another.

    There cannot be a serious discussion of 'property rights' without including Agenda 21.

    Google: the American Policy Center (APC) and follow the battle to stop the UN’s Agenda 21.

    Agenda 21, domestic drones, surveillance cameras, crushing EPA, DOE, etc. it's all connected, think the main stream media would tell you what's going on?

    Read it until it sinks in:

    "We are grateful to the Washington Post, the New York Times, Time Magazine and other great publications whose directors have attended our meetings and respected their promises of discretion for almost forty years….

    … It would have been impossible for us to develop our plan for THE WORLD if we had been subjected to the lights of publicity during those years. But, the world is more sophisticated and prepared to march towards a world government. The supranational sovereignty of an intellectual elite and world bankers is surely preferable to the national determination practiced in past centuries.”

    – David Rockefeller, Bilderberg Meeting, June 1991 Baden, Germany

    A must watch (and share):
    "more education increases the threat to sustainability" – you can't make this up.

    Youtube: Agenda 21 For Dummies

    Youtube: Agenda 21 for Public Officials

  3. Wolf Richter says:

    Rik – you hit the nail on the head when you say, "….paying half of the group to dig a hole and the other half to fill it up again." A good part of state spending is economically useless activity (though there may be some side benefits). If the French actually had to cut their budget (rather than just slowing down its increase) because they're having trouble funding their deficits (and can't print their way out of trouble), their GDP would collapse in part because their independent private sector faces such headwinds and won't be able to pick up the slack.

    In the US, we don't have that problem – we print ourselves to prosperity :)

  4. Rik says:

    But would the French people really be worse off.
    Back to my hole example, would I really care about the extra GDP I get because they are digging holes and filling them up again. In my world that doesnot increase my standard of living. It will be very similar if it is 80 without anything or 100 (80 real stuff and 20 hole digging). It is as far as I am concerned pure windowdressing (making the figures look good without any real added value only statistical value).
    As a citizen I look at standard of living not at GDP even real GDP. We only use GDP because it is so much easier to calculate with (as everything is in money and the same currency as well). But on this issue what we really want is standard of living (GDP is just a replacement measure). But GDP (growth) has turned to be a goal of its own, even when nobody cares for it (and it deviates from what really matters standard of living.
    Of course there are other effects V is probably higher, people buy new iThingies the moment they get their pay check. However before all this extra stuff was financed at the end of the day by borrowing. So it came on top of the normal stuff. Now that looks no longer possible so it is not extra it is in stead off.

    I bumped into some Dutch stuff (secundary source), they were messing up the costs of healthcare in the cabinet formation. It appeared that for the examples I have seen the real value people attribute to state services is probaly 50%ish. Even for healthcare it was only 70% (and that was for a mainly low income group, overall you would expect it to be lower and making this calculation I made 2 other assumptions that in real life will most likely make the rebate higher). And the Dutch state is much more efficient than the French. And that is not for stuff like the youth laborplan where the added value is probably more likely 10-30% would be my estimate.

    My guess was and is that this austerity drive well end with a reversal of the perpetually growing state, At the end of the day in Europe the middle groups are the main taxpayers as well as the majority voters. Plus with strikes they have real bargaining power (not workers, aged, and half the civil servants have simply not, as nobody would really miss them when they go on strike).
    My idea is that further on up the road if all the usual rescue stuff has failed we will see them demanding keeping their standard of living. Which in an aging no growth enviroment is only possible by lowering tax. Which can only be done itself by cutting in the apparatus and cutting entitlements to non-contributors.
    Europeans like their welfarestate. The problem is that next to aging the percentage of freeloaders has risen over the years enormously. As has the state apparatus (half the money is spend on things they did not have in say the 60s and didnot miss then). What has been added since has an even lower added real value as the state in general (would standard economics say and they are probably right).

    Interesting times. Makes Obama looks like really out of this world btw. In Europe the system fails and most likely will be reduced and he tries to introduce more in the US. Simply going against the sign/demands of times.

  5. Wolf Richter says:

    Rik – Increases in standards of living around the world, including in Europe, the US, and Japan, have been financed by debt. That worked like a charm for a while. There are economists out there who believe somehow that this will work forever.

    In your scenario of digging holes and filling them as a way to grow GDP, the people will be better off as long as the money is borrowed and doesn’t have to be paid back, and as long as even the cost of that money can be borrowed. But once that money has to be dealt with via taxes and inflation, standards of living come down. Something we’re seeing now.

    The digging-holes-and-filling-them concept applies to the defense industry where companies build high-dollar equipment so that the military can destroy it in a war or scrap it after it’s outdated. It applies to many other state-funded activities. The government funded jobs program is no worse economically. And given the desperation of those young people without jobs, it serves a better purpose.

    You’re so right: “But GDP (growth) has turned to be a goal of its own, even when nobody cares for it (and it deviates from what really matters, standard of living.” Per-capita GDP would be a somewhat better measure. And the formula should also include the debt incurred to get to that GDP. Suddenly, that new measure wouldn’t look so hot anymore.

    As you say, the time of austerity may well reverse the trend of the perpetually growing state, if it arrives in conjunction with declining populations, as in Japan, Germany, Italy, etc. But I think only a real fiscal emergency will be able to accomplish that, and as soon as money is available again, it will be spent. That’s how democracies work. Politicians have to buy the votes, and they also won’t be able to resist the corporate siren calls. Indeed interesting times.

  6. Rik says:

    Thanx for the idea. It is indeed much easier to start with per capita GDP and include items like the costs of borrowing (not only interest but also not limiting the posibility to borrow in the future in case eg of a huge disaster).

    In Europe I think they are really close to the end of the ever growing state. The shock-event needed for such a major change is imho near. They will have zero growth and a lot of financial pressure on their middleclasses that constitute 60-80% of their population. They will likley keep buying their vote but by way of tax reductions. They cannot afford the present system and certainly not when competition from Asia gets even more fierce plus costs of aging go through the roof. The problem politics has there:
    -it is not simply a dip normal growth in Europe will be structurally as high as the increase in healthcare/aging costs, not even to mention transfers in the pipeline to Europe's South.
    -solidarity financed reducing large groups of people's income doesnot work (it works temporarily in times of calamity and if it is financed from growth (but there is no growth now)).
    They have in making themselves more important created so many basketcases that in time of zero growth, the body of taxpayers will have their incomes substantially decreased in order to keep paying for it. I simply donot see that being sustainable. Solidarity in Europe has crossed the taxpayers Rio Grande. And in Europe because of the relative lack of rich people and the percentages the middleclasses pay the bulk of the taxes.

    Probably different in the US. Allthough the Laffer curve will imho peak at lower and lower levels. Too many and rapidly increasing possibilities to move things abroad. You simply donot need a HQ in the US or Europe anymore, not even to mention other functions in a company.

    Any way a system in which it is beneficial for more than half of the population to tax the smaller other half in order to pay for the former's entitlements, all short term focused( becuase of the from pay-check to pay-check effect) is imho as long term viable as Communism was. The system will collapse will take likley a few decades, but then you will be able to put another doctrine in the dustbin. They keep the welfarestate affordable or the system will kill itself.

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