Alan Kirman – The discredited economic vision at the root of France’s ‘gilets jaunes’ problem

An excellent analysis that brings us up to date with developments in the French government before and during the movement.

The movement is a reaction to measures that have hurt the poor while benefiting the wealthy and large firms, writes Alan Kirman

Alan Kirman is professor emeritus of economics at the University of Aix-Marseille III and at the École des Hautes Études en Sciences Sociales, and is a member of the Institut Universitaire de France.

Cross-posted from the LSE Business Review

At the end of the month of November, France suddenly went into revolution mode. Cars were burned and barricades were erected on the Champs-Élysées in Paris and there were prolonged battles between the ‘forces de l’ordre’ and the demonstrators. Hundreds of people were injured and nine deaths have been attributed directly or indirectly to the movement which had a third of a million people in the streets at the start and fewer but more violent crowds since.

The short description of what happened is that there has been rumbling discontent with the failure of real wages to rise and the impression that all the measures that have been taken by the current government have been in favour of the rich and that the ‘reforms’ that have been undertaken have simply made jobs less secure and have decreased the taxes on firms while increasing the contributions of those less well off.

Unfair taxes — the root of the problem?

The straw that broke the camel’s back was the hike in taxes leading to an increase in the price of petrol at the pumps. The increase was already programmed even before the arrival of the current government, and was designed to reduce carbon emissions and to get the price of diesel fuel to the same level as that of regular petrol. The relative increase in the price of diesel was in order to reduce the emissions of toxic fine particles. There are reasons why this is a particularly sensitive issue. In wealthy countries such a tax is regressive since it has much less impact on well-off car owners than on their poorer car-owning counterparts, who often cannot afford to live near their work and live in areas where public transport is hardly adequate. But the unfortunate consequence of the reaction to the tax increase has turned the fight into one in which the environment is set against improving the well-being of the poorer part of the French population.

The controversial carbon trajectory that had been agreed upon is now in danger. France, from being a leader in the environmental movement, is in danger of abandoning its plans in return for short-term peace on the streets. Nicolas Hulot, the popular minister for the environment, resigned some while ago since he became conscious that the environmental question was not high on the agenda of the government, and had been accorded little importance, despite statements about making our planet great again. The much vaunted reforms, that have got the government into this situation, have focused on liberalising the economy without taking into account the reaction of those who were hurt in the process.

Indeed, paradoxically, the most strident calls have not been about reducing the overall tax burden, but about shifting more of the burden to the wealthy and to firms. Recent polls show that the French would actually be prepared to pay higher taxes if they thought that they would be used productively and that the wealthy and the large firms would bear a bigger share of the burden. But, the message from the government is that any move in this direction would cause firms and wealthy individuals to flee France. It seems clear that the solution to this has to come through an international agreement to tax corporations in the places where they have their activity and not in the places where they establish or have taken over, their headquarters.

What the French complain bitterly about is what they perceive to be unfair taxes and the continual increases in them while too few see any benefit from this revenue. But, how high are taxes in France and on whom do they fall? A new report from the OECD sheds light on this. First note that France has beaten Denmark into first place for overall taxation at 46.2 per cent of GDP. Income tax, paradoxically, is a rather small part of contributions in France, at 27 per cent. The major item is VAT at about 50 per cent.

In another report, Patrick Artus shows that if you exclude VAT, the tax “burden” in France is 1 per cent below the average in the Eurozone, but with VAT it is 3 per cent above that average. This points to one of the major problems, with so much weight on indirect regressive taxes it should be no surprise that the poorest members of French society are the most hurt and indignant.

Another way of expressing this is that the movement of the ‘gilets’ is a reaction to the decline in purchasing power of the lower part of the income distribution, coupled with measures which have significantly improved the economic situation of the wealthier. The suppression of the ‘impôt sur la fortune’ on capital but not on real estate and the introduction of a flat tax on capital came while most of the French, in particular pensioners, have faced increases in the CSG (contribution sociale généralisée) a tax which is used to finance the social security system. The result is that when the purchasing power of the wealthiest 1 per cent increased by 6 per cent and that of the 0.1 per cent of the wealthiest went up by 20 per cent, the person in the street actually feels worse off.

The dynamics of protest

But what about the mechanics of the current uprising? Those who participate in the movement speak often about their anxiety about being able to make ends meet. This sense of insecurity affects a certain part of the population. Additional taxes with no accompanying increase in income add to the number in this situation. How many people are involved depends on the shape of the relevant segment of the income distribution and it could well be that more people have been pushed into the anxiety zone than the government had appreciated.

Now add to this the contagion effect, that is, the number of people who are influenced by the size of demonstrations, for example, and as a result feel the urge to join the movement, to voice their own worries. This became evident as the movement expanded to include secondary school pupils and university students both protesting against what they consider to be unsatisfactory reforms. One important consideration, emphasised by Julia Cagé in Le Monde, is that the current government is extraordinarily unrepresentative and confirms the person in the street’s impression that their ‘representatives’ are totally out of touch with reality. This is evidenced by the fact that there are no members of parliament who could be categorized as ‘working class’, and only 3 per cent who were salaried.

As a taxi driver said to me, ‘I am supposed to be represented by doctors, lawyers, and businessmen.’ This detachment from reality was emphasised recently when a minister in the government expressed his sympathy for those having to live on 900 euros a month in Paris when, as he said, a dinner for two, (without wine) in a Parisian restaurant costs around 200 euros. There was an avalanche of replies in posts on the web offering to tell the minister where he could eat satisfactorily for a week on that. This movement is unusual in that it seems to have no hierarchy and some, optimistically, think that it may open the door to a more participatory democracy.

The lack of hierarchy became evident when the gilets jaunes were asked to send representatives to discuss their problems with the prime minister. Only two turned up, one left after a few minutes and the other asked to remain anonymous. This movement has remained a spontaneous uprising without any self-organization for the moment. The main support, (according to a recent survey) comes from workers, 61 per cent, salaried employees, 56 per cent, while only 20 per cent of managers and employers were in favour.

As Cagé observed, Macron seems intent on resurrecting ‘la lutte des classes’, and the press has been full of articles on the rebirth of class warfare.

A discredited economic vision

A very sketchy review of the international press, with a few notable exceptions, reveals something interesting about the current view of macroeconomic policy. The basic theme of many respected newspapers, some of which could hardly be identified as right wing, is that Macron should hold his course and continue with his ‘reforms’, and simply show more empathy for those who are victims of the consequences of those reforms. In other words, he was on the right course but did not do enough for those who were left behind in the process. Indeed that was the tenor of his address to the nation. Nowhere was there any discussion of, or argument for, those reforms. They are, we are told, the only way out of stagnation and although painful in the short run will bear their fruits in the long term. France has to become more attractive to foreign and multinational enterprises and their arrival will kickstart growth. No evidence is provided for this, nor are many examples given of successful implementation. It is taken as given.

Yet, we are now in the twenty first century still hearing the discourse of the last century and there is a persistent failure to ask the fundamental question. Given the metamorphosis of our socio-economic system, what are the appropriate ways to radically modify our policies to ensure that fewer are left behind to start with, rather than continuing simply to placate the losers that emerge as a result of the policies of the past?

The recent OECD World Economic Forum in Korea, where an important theme was putting people at the centre of policies, bore testimony to the increasing gap between those explaining carefully and compassionately how to look after the poor and those still arguing for faster growth of the current system. A new report by Stiglitz and Fitoussi on going beyond GDP argued, as did its predecessor, for a more comprehensive measure of well-being and suggested that such a measure should be the yardstick for evaluating economic and social policies.

Growth, as it is usually understood, ignores the increasingly tight constraints with which our whole system is faced. Yet voices who argued that the basic functioning of the system and the policies put in place to ‘improve its efficiency’ and “increase competitivity” were to blame for the very existence of the ‘left behind’ were largely inaudible. France has not heard those voices either. Underlying even the modest concessions made by government is the idea that the ‘burden on firms’ has to be eased and that any aid to firms will automatically generate investment and hence increase employment.

This argument, which has been thoroughly investigated and, one would have thought, largely discredited, persists because it is what lies behind Macron’s entire economic vision. Consider the case of the promised increase in the minimum wage (the SMIC), by 100 euros per month. This is what was apparently proposed by Macron. In fact, what is promised is an increase in the ‘prime d’activité’. This is different because it does not count towards the pensions of those involved, does not concern all who earn the SMIC and does not increase the contributions paid by the employer. This manipulation to lighten the load of firms did not go unnoticed by the population.

The reaction of Macron’s party to the outcry was interesting. On December 17th the leader of the governing party, La République en Marche, said that the majority had insufficiently explained its measures and that its members had been ‘too intelligent and too subtle’. Even to make such a remark seems the hallmark of stupidity. Adding to the disquiet over the government’s behaviour is the sentiment that not only does it not explain its actions but it does not even inform its members about them. An interesting example of this was provided when the member who had to present the ‘projet de loi des finances’ for 2019 had to admit that the project did not include the measures promised by the government to calm the demonstrators. Neither the 10 billion euros which the measures are estimated to cost, nor the plans to finance them were included. So as one member observed ‘Next week we are going to discuss a bill which will already be obsolete’.

The public, even though not considered intelligent enough to understand the subtleties involved, might well be justified in having some doubts about the competence and the transparency of those at the helm. Immediately before I finished this letter, the government had proposed three new measures to placate the unhappy, but shortly after announced that it had decided to cancel them. Apparently, the conflict between those who are concerned about the debt and those who are more concerned by the social consequences of the dissatisfaction has not been resolved.

A further consequence of the recent events is that the police are now demanding urgent measures to restore their salaries to the level that they should have reached if their extra working hours above and beyond 35 hours per week had been paid in full. But this would immediately lead to similar demands from nurses and others whose salaries have stagnated. After the demonstrations the police claim, probably justifiably, to be exhausted but they see themselves as being in a strong negotiating position.

Looking ahead

At the time of writing it is far from clear where all of this will lead. Both the far right and the left are trying to capture the gilets jaunes movement. The question is whether the movement will turn into a political one and to what extent the claims that have been made in its name will change government thinking and policy. But a hint of what the government’s basic position is, notwithstanding the statements about listening to, and even hearing the messages from the demonstrators, is that there will be no going back on the ISF, the tax on ‘fortunes’. Such a step would be ‘punitive’ according to Macron, but my impression is that, that is exactly what a majority of French people want!

But a new year is arriving and I would not like to end on such an uncertain note. Rather, let me add a lighter note which is too good not to mention. As Brexit approached, the British government asked for bids to produce the new dark blue post-Brexit U.K. passport. As Prime Minister Theresa May said, the decision to change British passports from the burgundy shade used by most European Union countries to the traditional dark blue was an expression of British independence and sovereignty. Two companies were vying for this lucrative contract. One of them, with a long tradition of printing official U.K documents goes by the misleading name of De La Rue but is thoroughly British. De La Rue was set up in 1821 and has been printing official documents and banknotes since 1853. However, in April of this year it was announced with glee in the press here that the contract was awarded to a Franco Dutch company Gemalto. Let’s hope that no new referendum or miserable tariff interferes with the wonderfully ironic new arrangement.



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