by Paul R. Gregory
During the French presidential campaign, pundits assured us that Francois Hollande was simply playing to his socialist base. Once in office, he’d prove to be a pragmatist. All his talk of 75 percent income tax rates, wealth surcharges, infrastructure banks, new taxes on dividends, hiring more public employees, not giving an inch on entitlements, and punishing the financial sector was just talk. Two months later, we know Hollande meant every word. Armed with a solid parliamentary majority, he is carrying out his socialist agenda, no holds-barred.
I’d like to count them when the French economy goes down the toilet, as it certainly will unless Hollande changes course.
The American Left counts among Hollande’s many cheerleaders. At long last, a leader of France is standing up to the austerity crowd. Liberal New York Times columnist, Paul Krugman, rails against the Hollande hysteria of the staid Financial Times and the stingy Germans. Per Krugman: we need not fear someone who genuinely believes in the need for a fair society, and we know the mess we get into when the government does not run things. By ignoring the austerity nonsense, Hollande offers the “possibility of something better” not only for “new Keynesians and old socialists” but for France, Europe, and the world economy.
As they say, time will tell.
President Obama was diplomatically constrained not to root for Hollande, but he is a cheerleader no less. After all, French socialists are test driving Obama’s own electoral program. Obama must be watching with envy. If only he also could do what he wants without those obstructionist Republicans! If only he had not wasted his time on health care when he had both houses.
Since his inauguration on May 15, Hollande has been a whirlwind of socialist/leftist policy making. Echoing Obama’s 2008 declaration that “elections matter,” Hollande’s budget minister lectures that a “democratic correction” requires a “budget correction,” to wit:
First, Hollande reversed Sarkozy’s one push-back against the welfare state by returning the retirement age from 62 back to 60. Under a socialist Hollande, no one is going to lay a finger on France’s cradle-to-grave entitlements. His budgets call for the government to stay at two thirds of the economy. After all, government spending is not really “spending” but investment. We cannot afford to reduce “investments” in such a crucial time.
Second, Hollande raised the minimum wage using tired Keynesian logic that a higher minimum wage stimulates demand. Any economics 101 student knows you don’t raise the minimum wage with youth unemployment at almost twenty five percent, but fairness and “growth” left Hollande no choice. Instead of making France’s labor-market more flexible to compete on the world market, Hollande has chosen to make it worse. But do not fear. Hollande will hire 150,000 public employees to raise French productivity. Yes, you read it correctly. This is not a misprint.
On American Independence Day, Hollande really got down to the business of increasing “fairness” while simultaneously meeting France’s promise to reduce its 2013 budget deficit to three percent. His solution: tax the rich and big companies that are earning too much (like the evil oil companies). For every dollar of tax increases, Hollande plans to cut government spending by some 10 cents.
Hollande is actually implementing the Democratic Party’s dream to reduce the deficit by taxing the rich without cutting government. As Hollande’s finance minister delicately puts it: “The wealthiest households, the big companies, will be asked to contribute. In 2012 and 2013, the effort will be particularly big.” (They are no being asked. They are being told.)
Among Hollande’s taxes are a wealth surcharge on individuals with a “global” wealth of $1.6 million, a 75 percent tax on incomes above $1.25 million, a new tax on dividends, and special levies on the windfall profits of oil companies. The wealth tax will be between 1 and 1.5 percent on $7 to $25 million worth of net assets, says a specialist advising French investors on how to avoid it. A French tax lawyer calculates that a high-net-worth business executive with a $2.3 million salary, dividends and rental property would pay a “scandalous and confiscatory” marginal rate of 90.5 percent.
France’s independent Chamber of Auditors (the equivalent of our CBO) warns Hollande that he must find another $41 billion in addition to his $20 billion in deficit reduction. The Chamber points out that Hollande’s tax revenue projections assume positive economic growth in 2012 and 2013 – unlikely given the slip into recession. Quite a bucket of ice water tossed on Hollande’s head by his own technocrats.
Paul R. Gregory is a Research Fellow, Hoover Institution Cullen Professor of Economics, University of Houston. Gregory has a regular blog http://blogs.forbes.com/paulroderickgregory/at Forbes.com. He also serves on the GRIH Board of Scholars.