Regime Uncertainty: Why a French Economic Recovery is a Mirage

I recently pointed how France serves a critical example of the many parallel universes—or detachment between asset prices and economic reality—operating today, as consequence from the politicization of the markets.

Yet the mainstream rationalizes (or misrepresents) such dynamics as ‘economic growth recovery’.

While government statistics may show ‘growth’, real world developments in France suggests otherwise.

From this excellent article by Telegraph’s Anne Elizabeth Moutet (hat tip LewRockwell.com) [bold mine]

A poll on the front page of last Tuesday’s Le Monde, that bible of the French Left-leaning Establishment (think a simultaneously boring and hectoring Guardian), translated into stark figures the winter of François Hollande’s discontent.

More than 70 per cent of the French feel taxes are “excessive”, and 80 per cent believe the president’s economic policy is “misguided” and “inefficient”. This goes far beyond the tax exiles such as Gérard Depardieu, members of the Peugeot family or Chanel’s owners. Worse, after decades of living in one of the most redistributive systems in western Europe, 54 per cent of the French believe that taxes – of which there have been 84 new ones in the past two years, rising from 42 per cent of GDP in 2009 to 46.3 per cent this year – now widen social inequalities instead of reducing them.

Three  observations here:  

One, taxes have begun to affect the public’s confidence level and opinion of policies. 

Second, taxes induce social inequalities rather than reducing them, which goes contrary to the outcome conceived by populist politics of 'social justice' redistribution. 

And third, the increasingly repressive  tax regime has forced many capitalist out of France or has turned them into ‘tax exiles’.

Why French politicians resort to increasingly repressive taxes? The article continues

By 2014, France’s public expenditure will overtake Denmark’s to become the world’s highest: 57 per cent of GDP. In effect, just to keep in the same place, like a hamster on a wheel, and ensure that the European Central Bank in Frankfurt isn’t too unhappy with us, Hollande now needs cash. Technocrats, MPs and ministers have been instructed to find every euro they can rake in – in deferred benefits, cancelled tax credits, extra levies. As they ignore the notion of making some serious cuts (mooted at regular intervals by the IMF, the OECD and even France’s own Cour des Comptes), the result can be messy.

The answer is that the French government has been growing immensely far faster than the real economy. 

And instead of promoting productive enterprises, the government has resorted to bigger confiscation of the resources from the private sector.

So the political class (parasites) benefits at the expense of their shrinking (private sector) hosts who are now pushing back.

And taxes influence people’s incentives and the corollary, people’s action. The article again gives a lucid example

Take last year’s famous 75 per cent supertax, on individuals earning over one million euros a month. This has still not been implemented. First, it got struck down by France’s Constitutional Council on a technicality. Leaks suggested the rate would fall to 66 per cent. They were confirmed, then denied. Hollande eventually vowed that the tax would be paid by the targeted individuals’ employers, for daring to offer such “obscenely” high salaries. This has just been approved by the National Assembly, and must still pass the Senate. So far, it is only supposed to apply to 2013 and 2014 income, but no one knows if the bill will be prolonged, killed or transformed.

What we do know is that this non-existent (so far) tax has been the clincher that sent hundreds, possibly thousands of French citizens abroad: not just “the rich”, whom Hollande, during his victorious campaign, said he personally “disliked”, and who now are pushing up house prices in South Kensington and fighting bitterly over the Lycée Charles de Gaulle’s 1,200 new places; but also the ambitious young, who feel that their own country will turn on them the minute they achieve any measure of personal success…

“It’s not only that people don’t like to be treated like criminals just because they’re successful,” says a French banker friend who has recently moved to London. “But this uncertainty in every aspect of the tax system means it is impossible to do business: you don’t know what your future costs are, or your customer’s. You can’t buy, you can’t sell, you can’t hire, you can’t fire.”

This is a wonderful example of what Austrian economist Robert Higgs calls as the regime uncertainty or [bold mine]

a form of uncertainty related to the public’s—especially the private investors’—confidence in the future security of private property rights, which can be impaired by future regulatory changes (e.g., Dodd-Frank and Obamacare regulations), court decisions, administrative twists and turns, tax increases in various forms (e.g., Obamacare penalties enforced through the income-tax system), monetary-policy changes that threaten the dollar’s purchasing power and distort the allocation of credit, and personnel changes in the government’s corps of executives, judges, and assorted capos.

The likely effects of 84 new taxes and more coming plus a battery of regulations are...

First, these promotes insecurity of the French property rights regime “don’t like treated like criminals”, 

Second, such obscures economic calculation “you don’t know what your future costs are, or your customer’s” and 

Finally the same policies obstructs or impedes on the economic coordination process “You can’t buy, you can’t sell, you can’t hire, you can’t fire”

With an environment like this, real economic activities will shrivel as political consumption lords over private sector production. 

Diminishing real output means lesser taxes, bigger deficits (as above) and increasing reliance on more debt to fund current political spending programs

French government debt has now reached 93.5% of the statistical gdp according to countryeconomy.com. I suspect that this could be larger as statistical economy tends to inflate output.

So again while French politicians and their cronies benefits, the rest of the nation suffers—thus the wider incidence of inequality (as consequence of political inequality)

There will be a point where creditors will come to question on the quality of French debts, which I believe should be sooner than later. 

So no matter the recent 'sanguine' reaction by the French stock-bond market or how government statistics say “growth”, unless the French government realizes that economic growth emanates from productive enterprises, and not from confiscation, the French economy will remain in stagnation if not in depression.

Even ECB president Mario Draghi recently admitted of the limitations of central bank interventions. As quoted by Reuters:(bold mine)

The ECB has done as much as it can to stabilise markets and support the economy. Now governments and parliaments need to do all they can to raise growth potential.

Monetary policy cannot create real economic growth. If growth is stalling because the economy is not producing enough or because firms have lost competitiveness, this is beyond the power of the central bank to fix.

Well said.