“Francois Hollande” or “Homo Economicus Has Left the Room”

Many people may be forgiven for forgetting that France is one of the Worlds great nations. Let’s gloss over some of France’s economic credentials. Fifth largest nominal GDP, ninth largest in PPP adjusted terms and second largest economy in the European Union. Fifth largest exporter in the World, with over half a trillion of exports annually. Member of the G8 countries, G20 group, OECD, third highest military spending in the World and second largest gross foreign aid provider. Needless to say this stature and success has arisen because of the hard work, industriousness, and entrepreneurial spirit of the French people. The French people while reveling in their stature externally are much more cynical about their successes at home. Most Frenchmen speak of the “Glorious Thirty” and the “Pitiful Thirty” years, eras of post-war economic boom and subsequent economic stagnant malaise. Much attention and commentary is dedicated in political and intellectual circles to restoring the lost equilibrium of previous times of plenty. Much media analysis revolves around the stagnant fortunes of the French way of life and the middle class’ dwindling standard of living.

The French are also quite the political people. A country were successive constitutions have put the onus of wealth creation on governments and on individuals but only through their political choices. France thus, has seen successive ideologies and political currents wrestle with the central question of balancing collective wealth and well being with that of the individual. One might assume that through its rich political and governmental experiences certain lessons of history might have been learned. Moreover, the French being great internationalists and multilateralists, one might further assume that the country strives to benefit from the experience of its fellow nations with regard to its great equity dilemma. One would, seemingly, be wrong to assume these things. The popularity of France’s current presidential candidate front-runner would leave any Homo economicus perplexed.

The first big splash by the ‘Parti Socialiste’ presidential candidate came when he announced on live television that he wanted to impose a 75% top marginal income tax rate for revenues over a million euros. Other policies announced supposed to reduce ‘inequality’ were; a maximum lowest paid worker to CEO salary ratio of 1 to 20 and a new tax bracket from 150 000 euros to 1 000 000 at a higher 45% marginal rate (currently standing at ~41%). In Hollande’s campaign platform other musings are added to the effect of reducing income tax deductibles for the wealthy. Now, what might be the effect of such policies? (aside from giving Swiss bankers a collective orgasm). One effect would be to vilify the wealthy, to the point where many might leave, if not most. Since most wealthy people (first generation at least) are entrepreneurial and industrious business builders, maybe the intention is to reduce wealth and job creation? One French daily has aptly called the phenomenon of geographical tax jurisdiction arbitrage “Fiscal Exodus”. If the Laffer curve central thesis remains correct, all other things equal, the number of wealthy Frenchmen in Brussels, Geneva and London may well continue to swell.

Ultimately these measures are only for show. They only serve the populist and demagogic purpose of insuring the poor and disenfranchised vote with the socialist. A Hollande aide confessed that the measure might only bring in 250 million extra euros to the treasury, a paltry sum compared to the economic damages the policies will wrought. A policy that is sure to impact the treasury much more severely will be the promise to return the minimum legally insured retirement age back to 60 years of age. The present right of center French administration pushed through an increase in the minimum legally guaranteed retirement age to 62 from sixty back in 2010. The measure was put into place to more or less avoid a Greek fiscal fiasco when baby boomers begin to retire ‘en masse’. Francois Hollande plans to jettison that law, because he believes, apparently, that for every 2 years worked in one’s life, one deserves a year of retirement on average. Add on to that policy his intention to re-tinker the corporate tax rate (35% for large co.’s and as low as 15% for very small enterprises) this would cement France’s third place in the highest corporate tax rates for industrialized nations category. Combine the fact that progressiveness in corporate tax rates is just an incentive for small corporations to generate a maximum of dividend by not reinvesting profits into growth and the fact those marginal rates are going up and it would seem the French Socialist Party is on a war against international competitiveness!

While the above policies don’t really hold up to current economic thought standards, they can be forgiven as staples of the Left’s campaigning and showmanship. The policies that really drive me up the wall are Hollande’s policies towards the Euro. The first policy is one of negotiating a new fiscal treaty where Euro bonds would be issued. With benchmark French 10 year bonds yielding over 90 basis points over similar maturity German Bunds, the trans-Rhine cash grab is barely veiled. No wonder Angela Merkel does not want to meet her greedy potential counterpart. The second Euro Zone focused policy is even more morally hazardous than the first. The socialist candidate wants the ECB to adopt a dual mandate of inflation targeting and growth promotion. Never mind the moral hazard of bailing out broke Euro members, has nobody in the socialist party opened a Monetary Policy introductory book in the last 20 years? Since the early 1990’s central bank after central bank have shifted their monetary policy objectives from currency targeting and growth maximization to inflation targeting with invariably positive results. For a leading candidate to the highest public office of one the greatest nations of the World, to have such a crass and laymen understanding of fundamental economics is astounding to say the least.

So, while arguably the most archaic central bank of them all (the Fed) moves towards greater transparency and is subtly shifting its policy onus from a balance between inflation and growth towards inflation targeting, the French socialists want the ECB to move 20 years backward and forsake its stellar inflation record. Hollande could just as well shout out “To hell with responsibility and orthodoxy”. So let us recap. While the American Left embodied by the democrats and President Obama talk of lowering corporate taxes (to 28% at last check) and encourage the Fed to be more contemporary, the French Left embodied by Hollande wants to turn back the clock of time to a time were symbolism and intentions matter more than results, where its central bank would be ‘nicer’ to poor countries and its corporate tax rate would be higher. Let’s hope that sober economic thought prevails at the end of this campaign, because so far it’s only been mired in intellectual mediocrity. France has always wanted to go against the grain of conformity, who would have know that being conform even in success was so distasteful.

Shout out to our Ghanaian readers!

Cius

End of a Monopsony, Beginning of a New Era?

Canada is getting rid of one of its oldest market distorting institutions, the Canadian Wheat Board’s monopsony. Since its inception in 1935 the Canadian Wheat Board has been the only buyer of albertan, saskatchewan and manitoban barley and wheat. True to its electoral promise the conservative government is voting away the CWB’s market exclusivity. Western Canadian grain growers will now be free to market and sell their own products or choose their own intermediaries. While the move is not universally approved not least of which by a majority of the affected agricultures, it remains well worth celebrating.

Before moving to unilaterally de-monopolize the CWB the conservatives had organized a plebiscite of the farmers to seek political cover. The plebiscite was marginally defeated by wheat farmers and soundly defeated by barley farmers. Hence the wait for a majority government to move forward with the plan. Armed with a majority government the Conservatives have moved legislation to de-monopolize the Wheat Board by August 1st, 2012. Farmers will effectively be able to sell their produce on the open market or contract the grain marketer of their choice.

With the Conservatives 2010 move to block the hostile takeover of Potash Corp of Saskatchewan using the Investment Canada Act and the Conservatives public endorsements of Canada supply management schemes for poultry and dairy products, faith in Canada’ openness to foreign investment was on the skids. However, recent musings by ministers have been more encouraging. The governments bid to join the Trans Pacific Partnership is a case in point. Canada has seen its bid to enter the multilateral agreement  blocked based on its intransigence with regard to its agricultural policies. Prime Minister Stephen Harper has however indicated a willingness to put “everything on the table” in order to join negotiations. The file of Canadian-European free trade seems to be moving briskly as well with negotiations on the Comprehensive Economic and Trade Agreement. CETA is speculated to open up Canadian municipal procurement. While a few unions and entrenched interest will cry foul as they always do, it remains obvious to most that more trade only means more wealth on average.

The move to open up western Canadian agriculture to more competition was an easy move politically, as the conservative vote remains quite entrenched in the prairie provinces. Opening up poultry and dairy industries to more competition however is a much harder sell. Most of the poultry and dairy industries are concentrated in Ontario and Quebec, provinces containing ~60% of the Canadian population and vote. Political backlash from well organised farming syndicates from these provinces has turned discussion of liberalizing agriculture into a taboo. While Canada has traditionally been a positive element and proactive participant in international multilateralism, its stance on agricultural trade has prohibited it from helping the Doha round of trade talks escape collapse. On top of giving Canada a bad rap internationally, these two industries who’s members don’t even represent a single percent of the Canadian workforce, have been gouging consumers for decades without pity.

So it is time that the federal government brought down the gavel of justice on the heads of these special interest. It is time for Canada to liberalize its trade relationships. It’s time for Canadian entrepreneurs to start exporting increasingly competitive products to the rest of the World. It’s time Canadians began enjoying the fruits of trade which are higher quality products from home and abroad at cheaper prices. It’s time Canadian municipalities began running budget surpluses thanks to better priced procurement products and contracts. It’s time Canada did its part in alleviating World poverty not by splurging more resources on fruitless foreign aid development campaigns but rather by opening up its borders to the labour, services and goods of all nations and peoples of the World. It’s time for Conservatives to live up to the esteem that Canadians have bestowed upon them based on a fleeting impression that the CPC represent good economic stewardship! Riding Canada of an inefficient monopsony was a first step towards greater competitiveness and wealth, let CETA be the second but not the last.

Cius,

Many thanks to the readers of this blog from Vietnam!

Greece! Go Away!

I sometimes shiver with humiliation at the memories of my adolescence and the utter immaturity that characterized them. I comfort myself with the thought that I have outgrown them. I used to believe that people outgrew their baser adolescent instincts of selfishness, laziness and general disdain for responsibility, I could not phantom the possibility that an entire populace could degenerate into a mindless mob of collective adolescents. Greece has proved me oh so wrong. Now before anybody get’s up and antsy about the broad generalization I recognize that not all greeks are in the streets hooded in black and throwing fiery cocktails around. However, the despairing state of the Greek economy is the business of all those people and the general result of their cumulative collective decisions. The guilty parties are, in no particular order: tax evaders, union leaders and members, politicians, savers, voters, anarchists, socialists, wannabe monopolists, retirees, students and anyone silent on the going-ons of the county. That list I believe covers more or less the majority of the people from the small nation that gave the world democracy.

Reading up on the back and forth between Athens, the Troika and various European capitals I’ll admit to a sinking feeling of despair. Berlin’s demands just keep mounting and the absurdity of Greek politics never retreats. German flags are being burned in the streets of Greece, right-wing papers in the country compare Merkel to a Nazi while across the divide any remaining AAA country in the Euro are simply loosing interest in Greece who has proved a most unreliable partner in the battle for economic stability.

I’m no Keynesian but the repeated bouts of austerity demanded by Greece’s Euro creditors are pummelling the periphery’s economies harshly. I don’t believe I’ve ever heard a Monetarist or even an Austrian economist recommend pro-cyclical fiscal policy systemically. Austrians economists might say that recessions are good because they kill bad business models permitting the flowering of sustainable industry. However even the most die-hard fiscal hawks (me) have to admit that at an above 6% contraction yearly with no hope in sight for growth, even good businesses will flounder. That’s why fiscal consolidation in Greece needs to be accompanied by stimulus spending funded by the competitive parts of Europe. Pan-European unemployment insurance is the most sensible proposal that has not gone main stream yet. The moral hazard that will ensue is undeniable but until permanent mechanisms for intra-Euro fiscal transfers can be worked out, the benefits are surely worth the cost.

That said that the money masters’ responses to continued contraction in the periphery are inadequate, the reaction from the patients are increasingly unacceptable. In Italy the unions responses to the Monti plan for liberalization are tantamount to the summum of Human selfishness. While the house is burning the unions are trying to save their clothes while some are still trapped (the unemployed) admittedly while some have already fled (the tax evaders). The retired are equally deserving of blame silent on the whole affaire so long as their golden retirements are not threatened even when these same retirement plans are bankrupting their nation. But while Spain and Italy’s yields come down showing the markets forgiving side, or just the ECB vast manipulation skills, Greece and Portugal edge towards the brink. While tame in Lisbon, reactions in Athens are flaring up to an extreme.

I long ago learned that the most vociferous voices rarely represent or even understand the silent majority. The silent majority in most western countries are hard working middle class and relatively rational voters. Even when they are swindled into voting for a party that ill benefits their country’s these voters always (almost) correct their aim sending back their political systems to the center. This does not seem to be happening in Greece. Not only has the majority let its political leaders lead them to a path of reckless fiscal irresponsibility and stupidity, they now seem unwilling to admit to the wrongness of their ways. For God’s sake Greece’s politicians are asking to be the least trusted west of Tehran. Its anarchist youth are trying to give 80’s Italian terrorist youths a run for their money. To reverse an oft heard insult, the Greeks’ silent majority is about to be hoodwinked into poverty faster than Germans were into Nazism. Greeks have committed the cardinal sin of fiscal profligacy, they have been found guilty by the markets, they are now in a liquidity and solvency jail. The rest of Europe has posted bail, and now has promised to take Greece into a pseudo form of receivership in order to buy the fledging country a little decency and freedom. Greek response to the modest conditions demanded of it, spitting in the AAA’s faces. The audacity and hypocrisy demonstrated in the land of classical drama is baffling to say the least and shockingly amoral.

While I wish a speedy recovery for all of Europe and hope that the beauty of the European project can be furthered, I’d be lying if I didn’t say I believe the Greeks have lost all rights to participate in the next chapter of Europe’s history.