Privilege

I wrote about the riots happening in France a few weeks ago. I need to write some more about it because there is so much we might learn, as we deal with our own policy debates, about the economic and demographic predicament underpinning the turbulence.

The first time, I wrote about the urgent need to liberalize labor policies in order to prevent the present 24 percent unemployment rate among younger French workers from worsening. Ironically, that attempt to liberalize a highly protected labor market provoked violent protests from its intended beneficiaries: the French youth.

In a way, we could say that the turbulence in France is iconic.

The very people that the reform policies seek to liberate from an unsustainably rigid economic system are the very first ones who resist it. People tend to be short-sighted when existing – but dysfunctional – privileges are perceived threatened by reform.

We see the same in our own country. People would rather preserve an unsustainable system of subsidies rather than muster the discipline and competitiveness required to thrive. They would rather conserve an antiquated system that produced poverty rather than deal with new systems that are more efficient at generating wealth for the whole society.

Sometimes, the defense of dysfunctional privilege is garbed in complex pseudo-analysis: such as blaming our plight on some demon now fashionably called "globalization."

I benefited much from a truly competent essay written by Jacques Marseille in the latest issue of Time magazine. The author is professor of economic history at the Sorbonne University in Paris.

That essay presents a broader context within which the present turbulence in the streets of Paris may be better appreciated. That broader context likewise enriches consideration of our own domestic debate over economic reform.

Marseille points out that the French youth are victims of their elders.

For decades, the elder generations of Frenchmen accumulated quite a number of social benefits associated with the notion of a welfare state: shorter workweeks, longer vacations, guaranteed employment. That was a notion fashionable in the last century.

Those social benefits did not come without costs. They involved huge public borrowings to finance. Today, France has accumulated so large a public debt that the annual interest cost approximates that country’s annual income tax revenues.

Clearly, therefore, the previous generations enjoyed privileges that the next generations will have to pay for. France’s public debt can only be maintained, within the present policy architecture, by raising taxes abundantly. But doing so will price French goods and labor out of the market. Already, France is exhibiting signs of strain: higher unemployment rates, uncompetitive exports and the withering away of her industrial sector.

But the privileges won through many years of social struggle – such as the 35-hour workweek and high standards of labor protection – cannot be easily stripped away even if the very survival of this economy depended on it. The youth want employment – but with the same standards of labor protection their elders enjoyed.

They want their cake and eat it too.

And at the very first signs of labor liberalization, such as the controversial First Employment Contract which allows employers a freer hand to hire and fire – the young workers and the left-wing unions are out rioting in the streets.

Elsewhere in Europe, tough and visionary political leaders – Britain’s Margaret Thatcher and Germany’s Helmut Kohl – succeeded in re-engineering the welfare state system to make their economies more competitive (although at the cost of greater fiscal discipline, less subsidies, less job security, longer working hours, less concessions to organized labor and massive privatization). But the French have had difficulty doing the same. As a result, France is in danger of being left behind by her more vigorous, more liberalized neighbors.

In France, the mirage of a socialist paradise is alive and well even if that mirage has evaporated completely everywhere else. Those now rioting in the streets of Paris are fighting for that mirage to live on.

The great political resistance to liberalization in France will have long-term adverse consequences to the French people. The latest polls show 60 percent of Frenchmen anticipating that the quality of life of their next generation will not be as good as that of the preceding ones.

But even as they realize that, they are unwilling to take the bitter pill necessary to avoid things getting worse. They are unwilling to undertake the economic reforms necessary to make the French economy competitive once more, and thus capable of ensuring a more efficient economy that will keep present standards of living. They are unwilling to accept the fiscal discipline required to rein in the huge public debt.

In that way, they are so much like us.

The bulk of our public debt, if we look closely, was incurred because public enterprises, for many years, sold electricity below the cost of production, distributed water for nearly nothing and, to this day, sells rice at a loss. The tremendous subsidies required to cheat the market and keep consumers happy was financed by heavy borrowing. The accumulated weight of that borrowing is now a drag on the capacity of our economy to grow enough to avert widening poverty.

Unlike the French, we now have a government willing to pay the price of unpopularity in order to restore fiscal discipline: pricing goods such as power and water to reflect their real costs, removing subsidies and privatizing public enterprises that suffer chronic losses. We have raised public revenues through such things as the VAT in order to avert further borrowing that can only result in passing the costs to future generations.

Unlike the French, we have liberalized economic sectors that are now our more dynamic ones such as telecommunications and retail.

But as in France, there continue to be political forces whose minds are trapped in 19th century economics and who specialize in street demonstrations to resist the very reforms that have made our economy a little more sustainable.