The End of the France’s “bel époque” (beautiful era)?

I see France as one of the most critical countries that may trigger a global debt crisis, as well as, the end of the European Union project that could also incite a regional, if not world war III.

Historian Eric Margolis at Lew Rockwell asks if the current developments would mark the end of the French Belle Époque “beautiful era” or a “period characterized by optimism, peace at home and in Europe, new technology and scientific discoveries” attributed to the epoch of 1871 (Third French Republic) until 1914 (World War I);  (bold mine)

Now, the bad news. Glorious, beautiful, well-run France may be facing the end of its "bel époque." French industry has been ruined by overly powerful unions and their political allies in the Socialist Party.

One would be crazy these days to open a factory in France with its absurd 35-hour work week, endless vacations, surly unions, strikes, and social costs that add 50% to worker’s salaries. Laying off workers during downturns or closing plants involves siege warfare, with posturing socialist politicians fighting employers at every turn.

In an ominous new development, French have taken to comparing their economic malaise to Germany’s vibrant economy where past tough structural reforms in the labor market modernized and made its industry competitive.

Thanks to German’s intelligent system of vocational training for youth, its youngsters are at work while 45% of young French are unemployed. No wonder. French universities keep churning out unemployable graduates in social anthropology, sociology, and film-making.

Government in France employs 56% of all workers, an unsustainable cost that, with retirement at 60 and unemployment benefits – now 32% of GDP – is bleeding the economy to death. Even President Francois Holland’s recent tax increases will not save the economy from ruin – and France from a possible euro crisis.

The problem is that many French know their gravy train must slow down but they can’t bear to change. "La vie en rose" is just too seductive. Special interests – farmers, teachers, truckers, transport unions – demand the "rich" pay the bill. They can shut down France.

But there are not enough "rich" to foot France’s big bills – or America’s, for that matter. Many wealthy French are moving out of the country, like Gerard Depardieu, or quietly moving assets to more friendly locales. French fear that the desperate socialists will slap more and higher taxes on citizens and even on foreign residents. Louis XVI had similar cash problems.

France’s media is full of alarms all about how the industrious Germans are pulling way ahead, as if Germans were somehow a threat to France. This is potentially a very dangerous notion. The Franco-German entente is the rock upon which united Europe is built. Nothing must be allowed to endanger this architecture – particularly not envy, nationalism, and blaming the Teutons for France’s self-inflicted wounds.

What France urgently needs is another Charles De Gaulle who had the courage and strength to end the bitter war in Algeria in 1962 and bring stable government. A new De Gaulle must force drastic cuts in social welfare and spending, and force French to learn a new work ethic.

Socialists eventually run out of money said former UK Prime Minister M. Thatcher, France looks like a noteworthy example.

 

Public Choice at Work: French Taxman Charged with Dodging Taxes

Outside the public’s glamorized view, political agents are innately self-interested people. That’s the essence of the Public Choice theory propounded by the late distinguished economist James M. Buchanan together along with Gordon Tullock.

As Professor William Shughart II explains

...public choice, like the economic model of rational behavior on which it rests, assumes that people are guided chiefly by their own self-interests and, more important, that the motivations of people in the political process are no different from those of people in the steak, housing, or car market. They are the same human beings, after all. As such, voters “vote their pocketbooks,” supporting candidates and ballot propositions they think will make them personally better off; bureaucrats strive to advance their own careers; and politicians seek election or reelection to office. Public choice, in other words, simply transfers the rational actor model of economic theory to the realm of politics.

For real life examples, we need to look no further than the recent reports, where a big league French bureaucrat, supposedly in charge of pursuing tax evaders, has been accused with the same offense.

From the CNBC.com,

The man at the forefront of France's fight against fiscal fraud is now one of those being investigated.

Budget Minister Jerome Cahuzac has spent months singling out corporate multinational tax dodgers, citizens who live abroad to avoid taxes and those within France who stash money in overseas accounts.

Now he is ensnared in just the sort of investigation he thought would help turn France's finances around, as prosecutors take a close look at an online journal's allegations that he transferred money from a Swiss account into one in Singapore.

That's why the world of politics involves numerous of conflict of interests. In the case above, the proverbial fox guards the hen house.

Taxing Greeks: Separating Reality from Fiction

This terse article gives us a glimpse of the mechanics of how wealthy Greeks has successfully been able to avoid paying taxes

From the Wall Street Journal Blog,

That Greeks have a penchant for evading taxes isn’t exactly news — when tax collectors started comparing swimming-pool ownership with incomes, wealthy Greeks camouflaged their pools. And because hidden income is hidden, figuring the size of the tax dodge is difficult.

Armed with data from one of Greece’s ten largest banks, economists Nikolaos Artavanis, Adair Morse and Margarita Tsoutsoura recently set themselves to the task. The banks, with tens of thousands of customers across the country, provided loan and credit-card application and performance data. That not only gave the economists access to self-reported incomes, but also allowed them to infer the banks’ estimates of true incomes — which are likely closer to the mark.

The economists’ conservatively estimate that in 2009 some €28 billion in income went unreported. Taxed at 40%, that equates to €11.2 billion — nearly a third of Greece’s budget deficit.

Why hasn’t Greece done more to stop tax evasion? The economists were also able to identify the top tax-evading occupations — doctors and engineers ranked highest — and found they were heavily represented in Parliament.

It’s always easy to portray the solution to fiscal problems, through statistical estimates, as merely one of enforcement procedures of tax policies.

Unfortunately, such simple minded approach escapes the premises of people’s reactions to repressive social policies and to the parasitical relationships which underpins their political institutions.

As for some of the professional Greek elites, as noted above, their tax shields may have been derived through their participation in the political hierarchy.

Mainstream economists seem to forget that they are dealing with real people, who by nature will look after their interests by adapting to the realities of the evolving political economic environment.

And it is for this reason why top-down or centralized policies inherently fails.

Bank Regulations as Instruments of Repression

From IFC Review, (hat tip Dan Mitchell)

Banks and other financial services firms had to deal with 60 regulatory changes each working day during 2011, according to a report from Thomson Reuters Governance, Risk & Compliance, reports City AM.

Regulators around the world announced 14,215 changes in 2011, a 16 per cent increase from the 12,179 announcements in 2010.

The report shows that the majority of regulatory activity, 57 per cent, came from the US, while the UK and rest of Europe made up 22 per cent and Asia accounted for 15 per cent.

The volume of announcements, which can include anything from a speech which may signal the direction of a new regulation to a final binding rule, has grown continuously since 2008 when regulators issued 8,704 changes.

The firm warn that the level of announcements will increase even more during 2012 as governments tighten regulation and new directives, including those related to the US Dodd-Frank act, are implemented.’

The incredible pace of regulatory changes (60 regulatory changes a day!!!) will prompt for many innocent people to be charged as criminals as in my experience.

The deluge of banking regulations represents the repressive nature of arbitrary regulations which will and has been used to subjugate the citizenry or the public largely unaware of the existence of these regulations.

Yet these are intensifying signs of desperation by the politicians whom has conscripted, and or colluded, with the banking system to extort resources from the public to sustain their privileges.

In reality, the torrent of new regulations also account for as disguised capital controls or a form of financial repression. Harvard’s Carmen Reinhart in today’s Bloomberg OpEd writes,

some of these requirements may be motivated by a government’s desire to curb money laundering and tax evasion, the measures also amount, in some cases, to administrative capital controls.

So the public is being wangled financially and oppressed politically through a variety of new arbitrary regulations under the cover of money laundering and or tax evasion. Laws are being used to violate and restrain our freedom in the name of political expediency.

Anti Money Laundering Laws (AMLA) is an example of the numerous bank regulations that has been covered by the alterations in the banking regulatory regime. Cato’s Dan Mitchell discusses the law’s ineffectiveness.

On India’s Lost Government Revenues From ‘Corruption’

Columnist Megha Bahree of Forbes reports that a huge amount ($213 billion) of tax revenues had been lost to bribes, tax evasion and mispricing in India during 1948-2008.

These estimates were supposedly conservative because it may have excluded different forms of smuggling and missing data, aside from foregone interest charges.

Ms. Bahree writes, (bold highlights mine)

The flight of capital from the legal system accelerated once the Indian government eased its tight control with economic reforms that started in 1991, the report says. Part of the problem was that Indian’s economic liberalization wasn’t accompanied by better governance or more accountability in the system. So while this period started liberalization of trade, lowering of trade barriers, less control and less oversight, it also led to an increase in bribes (to get your goods out of customs more quickly, for instance) and higher tax evasion.

India’s underground economy has been estimated at 50% of the GDP, making it about $650 billion at the end of 2008. Of this, 72% is held abroad, estimates Dev Kar, the author of the report and a former senior economist at the International Monetary Fund.

My comments:

1. Bribes occur only when there are legal proscriptions.

Bribes are symptoms or representative of societal response to the existing maze of arbitrary regulations.

Absent these restrictions or obstacles, then there won’t be any incentive to bribe, or much less, commit to an act that would circumvent any laws.

In short, the economic liberalization isn’t to blame for the institutional inefficiencies but on the partiality or the tepidness of liberalization reforms.

The strength of any social institutions emanate from the respect for the rule of law.

2. Tax evasions, like bribes, are symptoms of circumvention to onerous statutes.

They represent as cost saving measures resorted to by many enterprises in the face of the high costs of doing business largely due to obstructive taxes and the cumbersome compliance costs from the incumbent regulatory regime.

In other words, in most instances, a regime of high taxes is likely to incentivize tax evasion. Thus, it would be inaccurate to link economic liberalization with tax evasion because the cause and effect does not square. Economic liberalization should translate to lower taxes predicated on less dependence on the government.

3. The 50% share of India’s underground economy is emblematic, not of economic liberalization, but of the bureaucratic morass and the oppressive regulatory structures that discourages half of the economy to participate in the legal framework.

Again they are symptoms of people shunning government regulations, which is tantamount to government failure.

Like any process there always will be a transition. This means that the current reforms made by India hasn’t been enough (but should be on path), and that people and the existing institutions, coming from a long rule of statism, has yet to fully assimilate on the benefits of economic freedom premised on the respect for private property and the adherence to the rule of law.

4. Lost government revenues can be seen both ways.

If it is pocketed by government officials then it is likely to be devoted to consumption activities thereby would be considered unproductive and thus have negative implications.

Whereas if lost government revenues gives private enterprises room to expand production or services then it could be seen as having positive effects. Yes, this is the positive aspect of corruption.

Of course one could argue that lost revenues deprives the government to spend for social projects.

But most of social spending itself is questionable.

Aside from the issues of wastage and corruption, most of these so called public goods can be handled better and more efficiently by the private sector.

More importantly, high dependence on social spending is likely to foster a culture of entitlement or parasitism that is unlikely to prompt people to engage in productive activities but in acrimonious partisan politics between political insiders and the outsiders, promote patron-client relations (or crony capitalism) and even nurture criminal or underground activities.

India’s corruption problems isn’t one that hails from economic liberalization but from the vestiges of statism.