What France Needs Is Le Abenomics
(Bloomberg View) -- Voters in France's presidential election are being asked to choose between supply-side economic reform, as offered by candidates like centrist Emmanuel Macron and center-right François Fillon, and demand-side reform, as promoted by the National Front's Marine Le Pen and Jean-Luc Melenchon.
The reality is that France needs both at the same time -- one without the other won't work. In other words, what France needs is le Abenomics.
It's unusual to see comparisons of France and Japan, yet the countries' macroeconomic pictures share some common features. The drags on growth are broadly similar: large public debts, an aging population, deflationary pressures, a two-tiered labor market, an over-regulated service sector, a tradition of industrial policy and a revolving door between the upper echelons of business and government. Growth has been disappointing in both countries despite world-class infrastructure, a highly skilled workforce world-beating firms and cultural prestige.
Like France, Japan in recent years was torn between those advising supply-side reforms, and those advocating demand-side reforms. Prime Minister Shinzo Abe essentially decided to slice the Gordian knot by saying "doing both.
Since then, Abenomics has proved largely successful. Headline gross domestic product growth has been slow, given that Japan's population is shrinking, but per-capita real growth has been relatively strong given the slowdown of China, according to the World Bank. Unemployment has dropped to levels not seen since the mid-1990s -- 2.8 percent and this amidst efforts to increase women's labor force participation rate. Japan is also showing strong credit growth. And all this has been accompanied by an ambitious program of structural reform, including new rules on corporate governance. Abenomics has its critics, but Japan, it must be said, is doing better than many expected given its challenges.
The case that France too suffers from both demand-side and supply-side constraints is strong. On the demand side, there is a consensus among macroeconomists not employed by the European Central Bank or the German Ministry of Finance that the euro zone's monetary policies have depressed aggregate demand, worsening the impact of the currency crisis and of austerity policies, as the Mercatus Center's David Beckworth has convincingly argued. While government spending increased under Socialist President François Hollande, so did taxes, particularly on capital gains and upper-middle-class households. According to the OFCE, an economic policy research institute of Sciences Po University, tax increases under François Hollande shaved 0.8 points off growth every year between 2012 and 2017. One of the key indicators of a demand problem is that the proceeds of corporate tax cuts under Hollande went to increased profit margins and dividends rather than investment or hiring.
So France needs both a jolt in aggregate demand and structural reform. But it needs both at the same time, as the author Nicolas Goetzmann argued in his 2013 book "Pulling Europe out of the Slump." Under conditions of deflation and mass unemployment, it's hard to see how regulatory reform alone would help much. For example, one of the major barriers to hiring is labor regulation; but it is also very high payroll taxes. Removing the regulations without the other barriers to hiring will certainly lead to layoffs; it is not certain if it will lead to the hiring that makes up for it. Meanwhile, without structural reform, injecting money into the economy could provide a momentary spurt, but would not lead to a self-sustaining cycle of growth.
The new French president should take advantage of historically low interest rates to invest in infrastructure and cut taxes across the board, particularly on labor. It should encourage small business lending as a way to increase the flow of money in the economy. The government should also embark on an ambitious agenda of labor market reform and opening up industries, such as retail, pharmacies and the legal profession, that currently have high regulatory barriers to entry. One kind of reform without the other will fail. The problem is that none of France's presidential candidates propose doing both.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Pascal-Emmanuel Gobry is a Paris-based writer and fellow at the Ethics and Public Policy Center.
To contact the author of this story: Pascal-Emmanuel Gobry at email@example.com.
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