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French Elections: Silver Lining Edition



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Over at the Wall Street Journal, their Global View columnist Bret Stephens has a very good piece on the French elections. Like many of us, I suppose, Stephens is amazed to see that French voters not only turned out en masse, but come May 6 (the second round of the elections) they will likely elect Socialist party challenger François Hollande. Obviously, President Sarkozy’s record has a lot to do with the situation (I would like to point out that, in spite the Sarkozy fever that reigned in American at the time of his elections five years ago, I had predicted that he would not deliver on his promises.)

Stephens writes:

Still, the mystery of France is how a nation can witness what happens to countries that live beyond their means and yet insist on living beyond its means. France’s debt-to-GDP ratio will rise to 90% this year from 59% a decade ago. It spends more of its GDP on welfare payments (28.4%) than any other state in the developed world. It has an employment rate of 62.8%, as compared to Germany’s 76.5% or Switzerland’s 82.9%.

These sorts of statistics may have been obscure before the economic crisis, when politics could still be the art of not making choices. Today you would need earplugs, a helmet and a burqa for the message not to get through. Nations, like people, cannot spend too much more than they make; otherwise they can lose their creditworthiness and go broke. Competition in a global economy is a reality, not an option. Wealth cannot be transferred if transfers also destroy wealth. Rich people can always take their money (and their tax payments) elsewhere. The “trade-off” between work and leisure is ultimately a choice between wealth and poverty.

Good question. The whole piece is very much worth reading. The dynamic described is puzzling and it is even depressing. However, I would like to provide one reason to be optimistic (or at least not super depressed) about this elections (Mom, are you listening?). When I think about the countries that have managed to engage in true reforms, many of them were led by left-leaning parties. Take Canada for instance. It’s the country’s Liberal Party that reduced the debt to GDP ratio from 67 percent to 29 percent in a few years by cutting spending in absolute terms and engaging in serious structural reforms. And, while it’s not exactly the same, during his two terms as president, Bill Clinton kept the size of government in check in a way Republicans didn’t when they were in control, and he managed to get welfare reform through.

Somehow, it may be easier to talk about controlling Medicare when you are a Democrat than when you are a Republican.

My colleague Matt Mitchell made that the same point a few months ago when he wrote that maybe all we needed in the US to finally reform Social Security, Medicare and Medicaid was a super Democrat. He pointed to some academic research:

And one piece of evidence for this is a 2004 paper in the Journal of Public Economics by the economist José Tavares. He writes:

In a panel of large fiscal adjustments in OECD countries during the last 40 years, we find evidence that left-wing and right-wing cabinets are partisan: the left tends to reduce the deficit by raising tax revenues while the right relies mostly on spending cuts. Our testable hypothesis is that cabinets can signal commitment by undertaking fiscal adjustments in ways that are not favored by their constituencies. In other words, the left gains credibility when it cuts spending while the right becomes more credible when it increases tax revenues. Probit estimates of the determinants of persistence in fiscal adjustments confirm that spending cuts by the left and tax increases by the right are associated with persistent adjustments.

So if it is spending cuts that we need, then these cuts are likely to be more sustainable (“persistent”) if they are executed by a left-leaning government.

So here is my “the glass is half full” outlook for France: Yes, the French will probably elect a Socialist. Yes, he will try to implement many bad policies. But at some point it will become obvious that there is no way to further avoid reforming the labor market, the social programs, and the tax system, or to avoid reducing spending. When that time comes (hopefully not too late), it may be easier for Hollande to push these reforms through than it would be for a free-market president (note that there were no free market candidate on the menu in France this time around), to make the French accept the reforms.

Now, I am going to keep my fingers crossed that I am right about this because, otherwise, the French are doomed.

By the way, one necessary condition for this theory to work is that the country must have a sense that there is no option left but to reform. That doesn’t apply to the U.S. While we do have a Democrat in the White House, there are still enough people in Congress, in the media, and across the country who believe that the U.S. will be just fine if we finally cut foreign-aid spending.



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