Sarkozy’s Stimulus Plan: Wrong Priorities

Sakozy’s Stimulus Plan: Wrong Priorities

NICOLAS SARKOZY, France’s hyperactive neo-monarchist president, has made a bet that the current recession is not a real economic crisis and therefore is not seeking a new motor of economic growth. Instead, he is doing the absolute minimum: making a lot of noise with very little overhaul.

Between two of the biggest strikes in mainland France in several years, Sarkozy added a rather modest, low-key stimulus plan—which included a small package of handouts for hard hit people—to the other items he dribbled out over the previous four months: two rounds of loans to banks, a mid-sized public works package, and marching orders to the nation’s “social partners” to negotiate (or else).

Let me start with the small package of handouts to individuals. The biggest item is a tax cut aimed at 6 million filers. 4.1 million of them will not have to send in the amounts that they owe this May and September. They are middle class in French terms, just above the threshold of those paying income tax (as opposed to the 16.5 million households who pay no income tax). In addition, some of those who usually do not pay income tax will get an additional check from the tax authorities to supplement their incomes from work. 1.1 billion Euros are budgeted for these handouts, and they will average less than 200 Euros for each person, which would represent about one week of full-time, take-home pay at minimum wage.

Other goodies in this package use tools already existing in the French socioeconomic system. First, before he announced the tax cuts to individuals, Sarkozy decreed a one-shot payment of 200 Euros each to those receiving the Revenu Minimum D’insertion (RMI). The RMI is a sub-poverty level minimum income provided to those who have no income from work or unemployment insurance.

Then, at the same time as those tax cuts, Sarkozy decreed a one-shot payment of the same order of magnitude (150 Euros) to the households that receive the special “back-to-school benefit” from the Family Benefits Funds. He also included,a coupon of 200 Euros to families that receive various benefits that allow them to pay for home help for aged parents, handicapped children, and young children who need daycare.

All these items will be welcome. They add to the significant amount the French welfare state already provides in means-tested benefits through the Family Benefits Funds to targeted groups of worthy recipients.

The third component of the small package addresses two subsets of the unemployed. One is people who are registered as unemployed but don’t get unemployment insurance, because they worked less than the four months that entitles one to unemployment benefits. These are the young and/or female: male temps in the building trades or women who have been laid off after short-term contracts in offices or shops. They are especially vulnerable and have been among the first to be sacked as unemployment has risen. The benefit for them will be 500 Euros (or about two weeks worth of minimum wage after social security contributions). The second subset of the unemployed is those who have full-time contracts but have been put on shorter hours. A special benefit already exists for them called “partial unemployment insurance.” Its value will be boosted to cover 75 percent of lost earnings.

These short-term benefits will come in handy for their recipients and will get to people who are already known to the authorities. They are, even, carefully thought out. But they are small and they are not universal and permanent changes to the main components of the welfare state. The government could have chosen to raise the minimum wage, which benefits about 15 percent of those who have jobs (part-time and full-time). Or it could have chosen to increase the family allowances paid to each family with two or more children.

These one-shot payments are not a Keynesian effort to jumpstart the economy by stimulating consumption. The amount is too small—3.3 billion Euros in all if you accept the government’s estimates. 3.3 billion Euros is less than 0.2 percent of France’s GDP. It is slightly more than the 2.8 billion Euros that the government laid out last year as a tax break to employers who hired hourly workers for more than the thirty-five hour workweek.

Sarkozy announced the bulk of this package on February 18 after the French unions had succeeded in bringing out more than their membership in the impressive January 29 strike. Their nationwide strike was doubly impressive because the unions have usually demonstrated on Saturdays rather than strike during the week.

In early February, Prime Minister Francois Fillon had given out some of the details of a 15 billion Euro package of infrastructure projects. The first 1000 projects represented less than 20 percent of the 15 billion. They were weighted heavily towards roads—in defiance of the priorities established by the December 2007 national conference on the environment. They provided some additional money for social housing and for urban renewal (far less than would be justified, given the touchy situation in the aging working class suburbs of major cities) and some money for schools, research centers, military installations, and the like.

In most cases, these infrastructure projects were ready to go and were moved a step closer to being started. They were sensible in that the groundwork had already been done (even though there still is substantial opposition to some of the projects from local militants). But these projects are not likely to create all that many jobs, even in construction, and are far from making the environment, writ large, the motor of economic growth (the way that a certain dramatic, more democratic president is trying to do on the other side of the Atlantic).

To the hand-out package and infrastructure package, one has to add some 6.5 billion Euros being provided to the automobile industry and some 1.6 billion that Sarkozy said he would provide to the housing industry. The total stimulus offered is therefore close to 26 billion Euros, which might come to 1.5 percent of France’s GDP. Nine or 10 billion of that amount had not been a part of Sarkozy’s original package of December 4, 2008, which had coincidentally also been valued at 26 billion. (His original package included government payments to businesses, which could help them with their cash flow, but looked a little like the shell game—more now, less later—rather than a genuine stimulus.)

Sarkozy had been forced to increase his total—a little—by the unions and the Socialist Party. The Socialist Party had its own “counterplan,” which it presented in January. It purported to be about twice as large. But it was disappointing conceptually. Like Sarkozy, the Socialists didn’t promise to make the environment the motor of growth. Nor did they promise to rebuild the working-class suburbs. They missed a real opportunity to orient the economy towards the future.
The Socialists’ counterplan centered on mass consumption: Five hundred Euros for the 9 million low-paid workers who receive a bonus from the tax authorities (Sarkozy’s package includes 150 Euros for 2 million), a 3 percent increase in the hourly minimum wage, a 1 percent reduction in the Value Added Tax (an idea borrowed from Britain), and 100,000 subsidized jobs (adding to the 300,000 that already exist). Not bad ideas, though they are a little late and all easily brushed aside by Sarkozy and his lieutenants.

WHY SO little money and so little imagination? Dominique Strauss-Kahn at the IMF is calling for much more and President Obama is offering the United States a lot more.

First, it is clear that Sarkozy doesn’t believe that the highest priority is to prevent a depression. He probably doesn’t think that it’s a possibility (gulp); he probably thinks that he can wait out a recession and let business return to usual. He’s probably listening to those economists who say that the budget deficit is too high. But Sarkozy also doesn’t believe in using mass consumption as the main source of economic growth. He believes that investment should be the main source of growth, which he wants to leave to private enterprise (who are cutting back on investment and R & D and hiring.)

Sarkozy is probably right on one account. Looking at the French recessions of 1974-75 and 1993, I would agree that it’s likely that a massive increase in consumption expenditure would lead to more imports rather than stimulating French factories and also possibly lead to inflation (not necessarily a bad thing in a deflationary situation). Mass consumption is necessary to keep the economy ticking, but it’s no longer the motor of new growth that it was from 1945 to 1973.

Raising the minimum wage, family allowances, unemployment benefits, and the minimum vieillesse paid to a portion of retirees is justified because of who the beneficiaries are. But justifying them on macroeconomic grounds is selling a pig in a poke. Mass consumption won’t provide capitalism with the new motor it needs. The motor also can’t be the two leading industries of the last thirty years: high tech and funny money. It especially can’t be funny money because all of those leveraged buyout funds and hedge funds and vulture funds and highly leveraged credits and sub-primes got us to where we are today. They should be regulated and not encouraged to start a new speculative bubble.

A third motive for providing such a small stimulus is that French mass consumption has been steady. Sarkozy is betting that his selective packets of 150-200 Euros will inject enough purchasing power when job losses and anxiety take more of a toll on consumption. Why has it been holding up? Because of the minimum wage and because of the automatic stabilizers built into the welfare state. The economic crisis has reduced the large contributions that companies and workers make to the Social Security funds (and unemployment insurance, which is outside of la Secu), but universal benefits have stayed up and the semi-universal benefits have been made more readily available to people.

Sarkozy has been encouraging the combined deficit of the governmental budget and the Social Security system to go up and covering his tracks by being slow to revise the estimates of the total public deficit. On March 4, the Minister of Finances raised the estimate to 5.6 percent of GDP. 5.6 percent of a nation’s GDP is healthy indeed, and so of course the European Commission screamed bloody murder. That’s the fourth reason that Sarkozy has done so little; the European Commission has been insisting on holding the line at 3 percent of GDP and have been threatening to fine France, Germany, and almost every other member of the EU for going beyond it.

The EU’s orthodoxy is meaningful in two ways. One, Europe is only of limited use in the crisis. There have been conversations among the national governments, but nothing like economic concertation—the agreement to all stimulate their economies in the same way. Europe’s budget is small and provides very little help to research or investment. The existence of the Euro has been beneficial to France—if the Franc still existed and floated all by itself, currency speculators would have made things a lot worse. And France has been able to run a deficit in its balance of trade without the IMF stepping in.

Secondly, it shows that nobody can copy the United States. The United States is unique. It can run both a budget deficit and a deficit in its balance of trade without anybody objecting. The orthodox economists—those who want to get back to business as usual without changing the system and without a new model of growth—want it that way. They want the United States to go back to being the consumer of last resort. They want the banks to get all the aid provided on their terms. (Sarkozy has provided the maximum amount of aid to the banks that the EU would accept, and only in the form of loans rather than taking a stake in them.)

Ultimately, Sarkozy thinks that the economic crisis is less important than getting ahead of his enemies: the environmentalists, the Socialists who control the local governments that build or finance most of the socially supported housing, the unions, and the public employees. Sarkozy wants to go on adding to his 2007 “reforms,” which have contributed to the squeeze that he presently finds himself in.

His first major piece of legislation included the tax break for overtime that I referred to above, because he wanted to undercut the thirty-five hour workweek and the whole idea of sharing out the limited amount of work available among those who want it (see my article in Dissent, Spring 2006). That first major act also included a “shield” for high taxpayers—which means that if he were to institute any new taxes, the richest would escape them.

His second major economic measure in 2007 was to say that only one new teacher or government worker would be hired for every two that retired or left. He’s ready to go on shrinking useful services, starting with the public hospitals. Shrinking government in a recession makes Sarkozy sound like Herbert Hoover in 1930.

SARKOZY MAY well win his bet. France and other nations may survive this recession without it becoming a depression. I hope so. But where will we be if he wins the bet? I think this is not an “ordinary” recession but is similar to the recession of 1974-75 for France. That recession was also global. It was sharp and intense; it was the start of a ten-year economic crisis. The economic structure had worn down. The industries that had led French growth for a generation were no longer growing rapidly and had to be replaced. That is true now for speculative finance and for cell phones. There is no new consumer good in sight that would spark real growth as compared with stabilizing the ordinary economy.

Getting out of this recession without providing a new purpose for the economy—a sustainable direction for growth to replace the currently worn-out model of the last twenty-five years—will only buy a little time.

Luther Carpenter is writing Comfort and Social Peace: A Biography of the French Welfare State.