Growth By Tax Hikes – Only in France

Curdled Sauce Hollandaise

Mountebank meets steel workers and promises to upend economic laws in their favor.

by Pater Tenebrarum

French president François Hollande continues to fulfill his election promises – promises that in essence amounted to the modern-day equivalent of a rain dance: the expectation to get desirable results from implementing policies that fly into the face of rational thinking.

In Hollande's case, it is all about fixing France's deteriorating deficit and nose-diving economy by blithely ignoring economic laws. In many respects his plans are not much different from those many other European governments have pursued, although his program has proved a good sight more radical.

According to Bloomberg:

“President Francois Hollande’s first annual budget raised taxes on the rich and big companies and included a minimum of spending cuts to reduce the deficit.

The 2013 blueprint relies on 20 billion euros ($26 billion) in tax increases, including a levy of 75 percent on incomes over 1 million euros, and eliminating limits on the wealth tax. Hollande aims to reduce spending by 10 billion euros, bringing the deficit to 3 percent of output from 4.5 percent in 2012. The budget predicts growth of 0.8 percent.

“It’s true we’re asking for an effort of the richest, the top 10 percent and the top 1 percent in particular,” Prime Minister Jean-Marc Ayrault said today. “Big companies of the CAC 40 pay less than the small companies and sometimes don’t pay at all. So we’re asking them for an effort too.” (emphasis added)

What a splendid idea – let's raise all sorts of taxes instead of cutting spending. How original! This has never been tried before! As to the 'predicted growth' – perhaps they got that information from Sylvia Browne? Since she even knows  the building codes pertaining in paradise (one can 'build a house anywhere in Heaven, unless it obscures the view of a river or some trees, in which case one needs permission'), predicting next year's economic growth in France should be a piece of cake for her.

There are good reasons to be skeptical of the growth prediction as it were. The tax hikes come just as economic output in France has fallen to a new 41-month low. GDP growth looks set to follow with a slight lag, as it often does:

France's composite PMI (flash) has fallen to a 41-month low of 44.1. Manufacturing output is at an even worse reading of 39.8

It is a good bet that the sharp slowdown in economic activity is a direct result of the policies the Hollande government has promised to enact. Businessmen are preparing for a period of hunkering down – after all, who wants to invest with people like Hollande and Montebourg in charge? It would be suicidal, unless one happens to be among the politically well-connected. Entrepreneurs survive inter alia by properly judging the future economic climate. Hollande's government has done everything to assure them that their role is to be that of milk cows who will be used to feed the voracious maw of Leviathan.

A contention repeated in countless press reports since Hollande came to power – and which has remained unquestioned for a long time -  meets with mild skepticism in the Bloomberg article:

“Hollande, whose has campaigned to shift Europe’s crisis- fighting focus to growth from austerity, wants to remain a credible counterweight to Germany, according to Socialist lawmaker Karine Berger.

Meeting the targets “is the only way to keep equality with Germany,” Berger said this week in an interview in Paris. “France’s weight at the table in Europe depends on Hollande making the growth case not for himself, but for others.”

The risk is that piling taxes onto an economy that has barely grown in five quarters will push the nation into a recession that erodes revenue collection.

France’s economy has failed to grow in four of the past five quarters. In the third quarter of last year, the only one to show an advance, the gain was 0.3 percent. Hollande’s government currently predicts growth of 0.8 percent next year.

Meanwhile, taxation has been rising. The increases announced today come after about 7 billion euros added in July and others implemented by Sarkozy’s government. Today’s budget also includes a new tax rate of 45 percent on incomes above 150,000 euros.” (emphasis added)

Yes, the 'growth president'  doesn't believe he needs the private sector for the generation of said growth – in his view government spending apparently equals growth.   It seems rather self-evident though that “piling taxes on an economy that has barely grown in five quarters” isn't likely to help much.

And so much for the 'only big businesses are going to face higher taxes' meme – who is likely to be making 'more than €150,000'? Only the big listed corporations? It seems the higher tax rates will squarely hit the middle class and small businesses in France.

There are hopeful rumors floating around that Hollande plans to do something to increase labor competitiveness to balance these measures out. If so, he could start by throwing out the entire 'code du travail' and rewriting it from scratch.

“Here’s a curious fact about the French economy: The country has 2.4 times as many companies with 49 employees as with 50. What difference does one employee make? Plenty, according to the French labor code.Once a company has at least 50 employees inside France, management must create three worker councils, introduce profit sharing, and submit restructuring plans to the councils if the company decides to fire workers for economic reasons.”

[…]

“The code sets hurdles for any company that seeks to shed jobs when it’s turning a profit. It also grants judges the authority to reverse staff cuts years after they’re initiated if companies don’t follow the rules. The courts even deem some violations of the code a criminal offense that could send executives to jail.” (emphasis added)

At least the minister of labor, Michel Sapin, seems to have realized that the ancient labor code needs to be modified. As reported in a recent WSJ article:

“By Mr. Sapin's own account, French labor laws are out of touch with reality. "They are ill-suited for an open economy, for evolving markets, for evolving technologies, and for the real economy," he said.”

All past attempts to alter the labor laws have been met with street protests and ended with the government retreating from the proposed changes. In that sense it could be helpful to have a socialist government giving it a try. Union leaders already eye Sapin with a measure of suspicion though:

Both union and business leaders say they respect Mr. Sapin, though some union representatives said they feared the minister would lean in favor of "bosses."

"This is a leftist government," said Mourad Rabhi, who will represent the powerful left-leaning Confédération Générale du Travail during the three-month discussion with business leaders. "It would be incredible if it adopted measures exclusively in favor of employers."

Mr. Sapin said he would observe strict neutrality in the talks.”

Considering where France's labor regulations are today, 'neutrality' is probably uncalled for, but evidently Sapin must tread carefully. We shall see what, if anything, he will be able to achieve.

France's industrial production. What exactly on this chart has inspired Hollande to raise taxes on business? – click for better resolution.

Not Even the Socialists Like It …

The irony is that not even the socialists like Hollande's budget, in spite of the skewering of the hated 'capitalist bourgeoisie' it delivers in such generous dollops. Over the weekend his competition on the left – the entire 'Left Front'  which consists of Jean-Luc Melanchon's 'Parti de Gauche', the French Communist Party, the 'Convention for a Progressive Alternative', the Unitarian Left and the Workers' Communist Party of France – marched against the 'austerity policy' of the euro area's fiscal treaty, to which Hollande's government subscribes. 

Never mind that such treaties cannot possibly be taken seriously anyway. We keep asking a question to which we have yet to get a satisfactory answer: what makes this treaty different from the Maastricht treaty? Why does anyone believe it will be easier to enforce it? Supposedly governments will ensure their future compliance by enshrining deficit and public debt targets in their countries' constitutions,  but that assumes that constitutional law is somehow less likely to be broken than a mere international treaty obligation. As far as we can tell, governments have no compunction about shredding their constitutions  any time they see fit, usually justifying doing so by citing an 'emergency'. Just look at what happened to 'habeas corpus' in the US.

Anyway, the French far left has basically been out demanding bigger deficits than the fiscal compact would allow. What if like in the euro area's periphery market participants simply stop lending to the government at the generous terms it enjoys today because it becomes too big a credit risk?

It is noteworthy that no-one has yet thought of demonstrating in favor of the free market. Sadly people seldom realize how important it is for society's welfare until it is taken away.

Micro-Managing Industry

Steel company Arcelor-Mittal's decision to close two steel plants that have been idle for the past 14 months has created a political storm in France. Similar to when Peugeot (the home of 'motion and emotion') tried to close loss-making plants, Hollande's 'minister for industrial renewal' Arnaud Montebourg was at hand to demand that Arcelor hew to the new 'Zwangswirtschaft' policy that nowadays reigns in France. It is no longer up to the nominal owners of factories to decide how to dispose of them – it is up to the government to make such decisions.

“Speaking to angry workers at the plant in the town of Florange, Industry Minister Arnaud Montebourg said Hollande had called onLakshmi Mittal to invest 150 million euros in the site or sell the furnaces.

"We are now in a conflict with ArcelorMittal," Montebourg said in a speech frequently interrupted by jeers. "It's a difficult tug-of-war."

"The French government has at the highest level insisted … that we want the restart of these two furnaces at Florange that have been idled for 14 months," he added.” (emphasis added)

Mountebank seems to think that steel producers are idling furnaces just for the heck of it. This is assuredly not the case. The decline in steel prices tells producers that they must cut back or eventually face ruin. The market is signaling to them that economic resources need to be redeployed to other, more profitable uses. It is not a matter of simply 'restarting the furnaces' as though that were the only economically beneficial course imaginable. 

Naturally, Arcelor-Mittal has in view of the political pressure vaguely committed itself to selling the furnaces:

“On Thursday, Hollande told Arcelor-Mittal chief executive Lakshmi Mittal to restart the idled furnaces or put them up for sale during a meeting at his office, following reports the steelmaker planned to shut them down.

Mittal "gave his consent in principle" to finding a buyer, Liberation wrote, citing a source in the president's office. The paper did not indicate whether a buyer had been identified.” (emphasis added)

Readers can probably immediately tell what the problem with this is: there is unlikely to be a buyer, otherwise the company would probably have sold the furnaces already. As an aside, it is not unusual for a highly cyclical industry to idle or mothball plants until demand improves again. In this particular case it seems rather more likely though that it would be best to sell the furnaces in question as scrap. So what's a hard-pressed socialist government to do? After all, Hollande promised during his campaign that he would keep those factories open. Why, they're going to 'order nature around' of course! (we can't thank Fred Sheehan enough for coming up with this apposite bon-mot).

“In a defiant speech in Florange this week, Industry Minister Arnaud Montebourg told irate workers the government was in a "tug of war" with Arcelor-Mittal over its plans and would not accept a total shutdown.

Montebourg also said the government aims to pass a law by the end of the year that would force firms intent on closing plants to sell them to alternative operators.

The law would strengthen the government's hand as it fights to save jobs ahead of several looming shutdowns including that of PSA Peugeot's car assembly plant in Aulnay. Peugeot has pledged to convert the site, but has yet to detail its plans.” (emphasis added)

Got that? Companies that want to close unprofitable plants will be 'forced to sell them to alternative operators'. How is that supposed to work if no 'alternative operators' can be found?

There are really only two possibilities in that case once such a law is on the books: either the company will have to continue operating its plants at a loss, or the government itself will have to buy and operate them.

Forcing companies to operate at a loss is presumably held to do wonders for economic growth in the world according to French socialists – however, it probably won't work the real world. The alternative, namely turning over the means of production to the State, has a definitive end point: the impossibility of economic calculation and with it, the end of anything resembling a rational economy.

Hollande's cabinet is full of career politicians and career bureaucrats. Not one of them has even the foggiest idea what it means to run a business. Who would be better suited to determine which plants to idle or close, and which ones to keep open and invest in?

The hubris of these people evidently knows no bounds, but it is easily surpassed by their economic illiteracy (Mr. Sapin possibly excepted? It remains to be seen). Are French voters aware what a bunch of incompetents they have put into power? Admittedly, the conservatives in France are only marginally better when it comes to economic policy – attempting to micro-manage industry was a hobby horse of Sarkozy's as well.

In fact, Sarkozy too rarely let an opportunity pass to display his ignorance of economic matters. Ranging from his demands for price controls for key commodities to his insistence on introducing the harmful and utterly useless financial transactions tax, he has given us many opportunities to criticize him while he was in power. However, we somehow doubt that he would have introduced a 75% top marginal tax rate.

In view of unemployment rising to a 13 year high, the 'growth president' is coming under political pressure. His 'solution' so far amounts to looking for ways to make it worse – click for better resolution.

Conclusion: 

So far, the Hollande government continues to act almost as though it wanted to deliberately sabotage the floundering French economy. There may be a faint ray of hope in the form of the planned attempt to reform the labor market, but we will file that under 'we'll believe it when we see it' for now. Unfortunately the anti-capitalistic mentality has a well-worn tradition in France, in spite of the fact that the country has been home to a number of eminent economic thinkers in the classical liberal tradition. Many Frenchmen have left for shores that are deemed more welcoming to entrepreneurs. Hollande has always insisted that he wants to promote economic growth – if he is serious about that, then he should consider a policy u-turn. Perhaps someone could give him Bastiat's collected works to read?