Poverty Under Democratic Socialism — Part I: the French Case

I saw a televised investigation by the pretty good French TV show, “Envoyé spécial” about current French poverty. It brought the viewer into the lives of six people. They included a retired married couple. The four others were of various ages. They lived in different parts of mainland France. All sounded French born to me. (I have a good ear for accents; trust me.) All were well spoken. The participants had been chosen to illustrate a sort of middle-class poverty, maybe. Or, perhaps to illustrate the commonness of poverty in one of the first countries to industrialize.

All the interviewees looked good. They seemed healthy. None was emaciated; none was grossly obese, as the ill-fed everywhere often are. All were well dressed, by my admittedly low standards. (I live in the People’s Democratic Republic of Santa Cruz, CA where looking dapper is counter-revolutionary.) None of those featured was in rags or wearing clothes inappropriate for the season.

The reporter took the viewer into these people’s homes. There was no indoor tour but you could see that the outside of the houses was in good repair. Most of the interviewing took place in kitchens. Every kitchen seemed equipped like mine, more than adequately. There was a range and a refrigerator in each. Every house had at least one television set.(I couldn’t determine of what quality.) No one said he or she was cold in the winter though two complained about their heating bills.

The show was geared to sob stories and it got them. Each participant expressed his or her frustration about lacking “money,” precisely, specifically. It seems to me that all but two talked about money for “extras.” I am guessing, that “extras” mean all that is not absolutely necessary to live in fairly dignified comfort. One single woman in her forties mentioned that she had not had a cup of coffee in a café for a year or more. (Keep her in mind.)

Another woman talked about the difficulty of keeping her tank filled. She remarked that a car was indispensable where she lived, to go to her occasional work and to doctors’ appointments. Her small car looked fine in the video. The woman drove it easily, seemingly without anxiety or effort.

A woman of about forty, divorced, took care of her two teenage daughters at home two weeks out of each month. She explained how she went without meat for all of the two weeks that her daughters were away. She did this so she could afford to serve them meat every day that they were with her. I could not repress the spontaneous and cynical reaction that most doctors would probably approve of her diet.

Yet, another woman, single and in her thirties, displayed her monthly budget on her kitchen table. She demonstrated easily that once she had paid all her bills, she had a pathetically small amount of money left. (I think it was about $120 for one month.) She had a boyfriend, a sort of good-looking live-in help whose earnings, if any, were not mentioned.

The retired couple sticks to my mind. The man was a retired blue-collar worker. They were both alert and in good shape. Their living room was comfy. They also talked about their bills – including for heating – absorbing all of their income. The wife remarked that they had not taken a vacation in several years. She meant that she and her husband had not been able to get away on vacation, somewhere else, away from their house and from their town. They lived close to a part of France where some rich Americans dream of retiring some day, and where many Brits actually live.

I ended up a little perplexed. On the one hand, I could empathize with those people’s obvious distress. On the other hand, I got yanked back to reality toward the end when the retired lady blamed the government for the tightness of her household budget. Then I realized that others had tacitly done the same. The consensus – which the reporter did not try expressly to produce – would have been something like this: The government should do something for me (no matter who is responsible for the dire straights I am in now).

Notably, not one of the people in the report had a health care complaint, not even the senior retired couple.

So, of course, I have to ask: Why are all those people who live far from abject poverty, by conventional standards, why do all those people convey unhappiness?

The first answer is obvious to me only because I was reared in France, where I retain substantial ties: Many small French towns are dreadfully boring, always have been. That’s true, at least, if you don’t fish and hunt, or have a passion for gardening, and if you don’t attend church. (But the French are not going to church anymore; nothing has taken the social place of church.)

And then, there is the issue of what the French collectively can really afford. This question in turn is related to productivity and, separately, to taxation. I consider each in turn.

French productivity

According to the most conventional measure – value produced per hour worked – French productivity is very high, close to the German, and not far from American productivity: Something like 93% of American productivity for the French vs 95% for the Germans. (Switzerland’s is only 86%.) However, to discuss how much money is available for all French people together, we need another measure: the value of French production divided by the number of French people. Annual Gross Domestic Product per capita is close enough for my purpose. (The version I use is corrected to incorporate the fact that the buying power of a dollar is not the same in all countries: “GDP/capita, Purchasing Power Parity”).

For 2017, the French GDP/capita was $43,600, while the German was $50,200. (The American was $59,500.) Keep in mind the $6,600 difference between the French and the German GDP/capita (data).

If French workers are almost as productive as the Germans when they work, what can account for the low French GDP/capita? The answer is that the French don’t work much. Begin with the 35/hr legal work week. (1) (A study published recently in the daily Le Figaro asserts that 1/3 of the 1.1 million public servants work even less than 35 hours per week.) Consider also the universal maximum retirement age of 62 (vs 67 in Germany), a spring quarter pleasantly spiked with three-day weekends for all, a legal annual vacation of at least thirty days applied universally, a common additional (short) winter (snow) vacation. I have read (I can’t confirm the source) that the fully employed members of the French labor force work an average of 600 hours per year, one of the lowest counts in the world. Also log legal paid maternity leave. Finish with an official unemployment rate hovering around 9 to 10% for more than thirty years. All this, might account for the $6,600 per year that the Germans have and the French don’t.

There is more that is seldom mentioned. The fastest way for a country to raise the official, numerical productivity of its workers is to put out of work many of its low-productive workers. (That’s because the official figure is an arithmetic mean, an average.) This can be achieved entirely through regulations forbidding, for example, food trucks, informal seamstress services, and old-fashioned hair salons in private living rooms, and, in general, by making life less than easy for small businesses based on traditional techniques. This can be achieved entirely – and even inadvertently – from a well-meaning wish to regulate for the collective good. The more of this you do, the higher your productivity per capita appears to be and also, the higher your unemployment, and the less income is available to go around. I think the official high French productivity oddly distorts the image of real French income. I suspect it fools many French people, including public officials: They think they are wealthier than they are.

La vie est belle!

The French have nearly free health care – which works approximately as well as Medicare in the USA, well enough, anyway. (French life expectancy is higher than American expectancy.) Education is tuition-free at all levels. There are free school lunches for practically anyone who asks. University cafeterias are subsidized by the government (and pretty good by, say, English restaurant standards!) Many college students receive a stipend. Free drop-off daycare centers are common in big and in medium-size cities. Unemployment benefits can easily last for two years, three for older workers. They amount to something like 55% of the last wages earned, up to 75% for some.

That’s not all. The fact that France won the World Cup in soccer in 2018 suggests that the practice of that sport is widespread and well supported. It’s mostly government subsidized. Other sports are also well subsidized. French freeways are second to none. They are mostly turnpikes but the next network of roads down is excellent, and even the next below that. This is all kind of munificent, by American standards. The French are taken care of, almost no matter what. The central government handles nearly all of this distribution of services directly and some, indirectly through grants that local entities have to beg for.

Someone has to pay for all this generosity. After sixty or seventy years, many, perhaps most French people, still believe that the rich, the very rich, have enough money that can be pried from their clutching hands to pay for the good things they have, plus the better things they wish for. (No hard numbers here, but I would bet that ¾ of French adults believe this.) In fact, multi-fingered, ubiquitous, invasive taxation of the many who are not very rich pays for all of it.

French taxation

The French value added tax (VAT) is 20% on nearly all transactions. When a grower sells $100 of apples to a jelly producer, the bill comes to $120. When the jelly-maker in turn sells his product to a grocery wholesaler, his $200 bill goes up to $240, etc. Retail prices are correspondingly high. The French are not able to cheat all the time on the VAT although many try. (Penalties are costly on the one hand, but there exists a complicated, frustrating official scheme to get back part of the VAT you do pay, on the other hand.) I speculate that the VAT is so high because the French state does not have the political will nor the capacity to collect an effective, normal income tax, a progressive income tax. Overall, the French fiscal system is not progressive; it may be unintentionally regressive. To compensate, until the Macron administration, there was a significant tax on wealth. (That’s double taxation, of course.) It’s widely believed that rich French people are escaping to Belgium, Switzerland, and even to Russia (like the actor Gérard Dupardieu).

The excise taxes are especially high, including the tax on gasoline. In 2018, the mean price of gasoline in France was about 60% higher than the mean price in California, where gas is the most taxed in the Union. An increase to gasoline taxes, supposedly in the name of saving the environment, is what triggered the “yellow vests” rebellion in the fall of 2018. Gasoline taxes are particularly regressive in a country like France where many next-to-poor people need a car because they are relegated to small towns, far from both essential services and work. (2)

All in all, the French central government takes in about 55% of the GDP. This may be the highest percentage in the world; it’s very high by any standard. It dries up much money that would otherwise be available to free enterprise. Less obviously but perhaps more significantly, it curtails severely what people individually, especially, low income citizens, may spend freely, of their own initiative.

What’s wrong?

So, with their abundant and competent social services, with their free schooling, with their prodigal unemployment benefits, with their superb roads, with their government-supported prowess in soccer, what do the French people in the documentary really complain about? Two things, I think.

Remember the woman who couldn’t afford to take her coffee in a café? Well, the French have never been very good at clubs, associations, etc. They are also somewhat reserved about inviting others to their homes. The café is where you avail yourself of the small luxury of avoiding cooking chores with an inexpensive but tasty sandwich. It’s pretty much the only place where you can go on the spur of the moment. It’s where you may bump into friends and, into almost-friends who may eventually become friends. It’s the place where you may actually make new friends. It’s the best perch from which to glare at enemies. It’s where that woman may have a chance to overhear slightly ribald comments that will make her smile. (Not yet forbidden in France!) The café is also just about the only locale where different age groups bump into one another. The café is where you will absorb passively some of that human warmth that television has tried for fifty years but failed to dispense.

This is not a frivolous nor a trivial concern. In smaller French towns, a person who does not spend time in cafés is deprived of an implicit but yet significant part of her humanity. The cup of coffee the woman cannot afford in a café may well be the concrete, humble, quotidian expression of liberty for many in other developed countries as well. (After all, Starbucks did not succeed merely by selling overpriced beverages.) The woman in the video cannot go to cafés because the social services she enjoys and supports – on a mandatory basis – leave no financial room for free choice, even about tiny luxuries. She suffers from the consequences of a broad societal pick that no one forced on her. In general, not much was imposed on her from above that she might have readily resisted. It was all done by fairly small, cumulative democratic decisions. In the end, there is just not enough looseness in the socio-economic space she inhabits to induce happiness.

She is an existential victim of what can loosely be called “democratic socialism.” It’s “democratic” because France has all the attributes of a representative republic where the rule of law prevails. It’s “socialistic” in the vague sense in which the term is used in America today. Unfortunately, there is no French Bureau of Missing and Lost Little Joys to assess and remedy her discontent. Democratic socialism is taking care of the woman but it leaves her no elbow room, space for recreation, in the original meaning of the word: “re-creation.”

The second thing participants in the documentary complain about is a sense of abandonment by government. Few of them are old enough to remember the bad old days before the French welfare state was fully established. They have expected to be taken care of all their adult lives. If anything is not satisfactory in their lives, they wait for the government to deal with it, even it takes some street protests. Seldom are other solutions, solutions based on private initiative, even considered. But the fault for their helplessness lies with more than their own passive attitudes. An overwhelming sense of fairness and an exaggerated demand for safety combine with the government’s unceasing quest for revenue to make starting a small business, for example, difficult and expensive. France is a country where you first fill forms for permission to operate, and then pay business taxes before you have even earned any business income.

The French have democratically built for themselves a soft cradle that’s feeling more and more like a lead coffin. It’s not obvious enough of them understand this to reverse the trend, or that they could if they wished to. There is also some vague worry about their ability to maintain the cradle for their children and for their children’s children.


(1) I am aware of the fact that there exists a strong inverse correlation between length of week worked and GDP/capita: In general, the richer the country, the shorter the work week. Again, this is based on a kind of average. It allows for exceptions. It seems to me the French awarded themselves a short work week before they were rich enough to afford it.

(2) You may wonder why I don’t mention the French debt ratio (amount of public debt/GDP). All the amenities I describe must cost a lot of money and the temptation to finance them partly through debt must be great. In fact, the French debt ratio is lower than the American: 96% to 109% in 2018 according to the International Monetary Fund. This is a little surprising but all debtors are not equal. A country with near full employment and plenty of talent is better able to pay off its debts than one with high long term unemployment and a labor force decreasingly accustomed to laboring. The latter is, of course, a predictable result of inter-generational unemployment and underemployment. Nowadays, it’s common to cross paths in France with people over thirty who have never experienced paid work. International investors think like me about the inequality of debtors. Investors flock to the US but they are reserved about France.

[Editor’s note: You can find the entire, longform essay here if you don’t want to wait for Parts II and III.]

Eye Candy: The HDI of BRICS

Phew, that’s a lot of acronyms. But this is a great map:

NOL map BRICS subunits
Click here to zoom

Orange and yellow is bad, green and blue is good. HDI stands for “Human Development Index,” which is a measurement that’s not nearly as good, in my opinion, for understanding how wealthy and happy a population is. Nevertheless, HDI is still one of the better measurements (Top 5, again in my opinion) out there. Here’s the wiki on HDI.

The maps are colored according to “subunits,” or provinces (which are like American states, such as Nebraska).

Brazil, India, and South Africa are multi-party democracies, while the other two are not. So what do all five have in common?

Eye Candy: the states in India’s federation

NOL India's states
Click here to zoom

Stay tuned for more on India from a sub-state perspective. I’m going to find the GDP (PPP) per capitas of these states. I’m going to find their population densities. I’m going to find their literacy rates and their life expectancy rates. I’m going to find out much more about India over the coming 12 to 16 months.

In the meantime, here are all of NOL‘s posts from Tridivesh, a resident of New Delhi. And here are all of NOL‘s posts from Shree, a resident of New York.

Nightcap

  1. The Left’s Double Standard on the Power of Media Madeline Grant, CapX
  2. What Happens Next for British Left? Zoe Williams, Times Literary Supplement
  3. Americans are richer and happier than Europeans Scott Sumner, EconLog
  4. South Africa decides Zimbabwe is an instruction manual Johnathan Pearce, Samizdata

Digging Deeper into Populism: A Short Reply to Derril Watson

Derril Watson offer some critical remarks on my short post about populism in Latin America. In short, Watson is arguing that (1) I’m stating something obvious (populism diminishes economic freedom) and (2) that I’m wrong when I say that populism fails to produce economic growth.

Seems I haven’t been quite clear, because I state none of the above. The intention of my post is not to show that populism decreases economic freedom, I think this is uncontroversial. The point of the post is to show, with a very simple calculation, how fast economic freedom is reduced. I might be wrong, but I have the impression that most individuals do not realize how fast they can loose their economic liberties under this type of government. This is the message carried in the title of the post “How fast does populism destroy economic freedom in Latin America?” rather than “Does populism destroy economic freedom in Latin America?”

With respect to the second point, my claim is not that under populism there is no growth of GDP, my claim is that “populist governments failed to increase GDP per capita consistently faster than the region.” My original post is just a small bite of a paper that is still work in progress and I’ll share in due time. I wasn’t expecting this claim to be controversial. Still, the figure below shows the ratio of GDP per capita (PPP) of each of he countries I observe with respect to Latin America. All countries are centered in year 0 as the first year of populism as defined in my original post. That’s the first dot in the graph. The second dot shows either the last data available or the end of populism. None of these countries show a consistent higher growth rate than the rest of the region.

Populism - Fig 1

It seems to me that Watson is confusing growth with recovery. The fact that economic growth produces a growth in GDP does not mean that a growth in GDP is due to economic growth. The recovery mentioned by Watson in Argentina happens after the largest crisis in the history of the country and the largest default worldwide at the time. As I mentioned in my post, Argentina hits stagflation in 2007. This suggests to me a rapid recovery with no significant growth and built upon an unsustainable policy (for instance, Argentina fails to improve its relative income with respect to the region, it rather stagnates in 2007 and starts to fall a few years after.) I can show a large increase in my personal GDP as measured by consumption by depleting my savings (consuming my capital stock at the country level). I wouldn’t call that personal economic growth. The Kirchner government, for instance, failed to reduce poverty below the levels seen in the 1990s. It does, of course, if that is compared with the poverty levels around the years of the crisis (which is what Watson’s table is doing.) It should also be kept in mind that official poverty measures in Argentine were hampered by the government.

There’s still another important issue regarding GDP measures of Argentina. As it became well known, GDP series were hampered by the government (also inflation and poverty rates were hampered.) By 2014 official GDP values were overestimating the size of the economy by 24%. Another sign is the evolution of real wages in Argentina, which hits a ceiling again in 2007 with a level similar to the one at the end of 2001 (just before the crisis). In 2008, 2009, and 2010 real wages decline.

As a final comment, I’m not sure to what comment of mine Watson refers to. I don’t see a comment entry of mine in my original post, nor I remember doing so. In any case, I don’t get into the definition of populism precisely for how difficult that task can be. The problem of defying populism is one of the areas covered in my yet unfinished paper.

On getting the data right : price disparities before 1914

I am a weird bird. I get excited at weird things. I get excited at reading economics and history papers (and books). I get particularly excited when I read papers and books that “get the data right”. This is because I believe that most theoretical debates in economics stem from poor data forcing us to develop grandiose theories or very advanced models to explain simple things. One example of that is the work of Joshua Hendrickson who argued that monetary aggregates (M1, M2 etc.) are not necessarily perfect indicators of money. However, these aggregates were used in statistical tests and generated strange results inconsistent with theory. This issue has been the cause of many debates. Josh stepped in and said that we just had a variable that was not created to measure what the theory said. Using broader measures of money, he found the results consistent with theory. The debates were driven by poor data (as I think is the case in issues over fiscal multipliers, crowding-out and business cycles).

Thus, I am always excited to see data work that “get things right”. One recent example that adds to cases like that of Hendrickson is Peter Lindert’s working paper at the National Bureau of Economic Researcher. Now, before I proceed, I must state that I am very partial to Lindert as he has been a big supporter of my own research and has volunteered important quantities of his time to helping me move forward. Thus, I have a favorable bias towards Lindert (and his partner in crime, Jeffrey Williamson).  Nonetheless, his working paper requires a discussion because it “gets prices right”.

The essence of his new working paper is that our GDP per capita estimates prior to 1914 may overestimate divergence between countries over time.

Generally, when we measure GDP, we try to derive “volume indexes” that measure quantities produced at a fixed vector of prices. For example, when I measured Canadian economic growth from 1688 to 1790 (I am submitting it in a few weeks), I took the quantities of grain reported in censuses and weighed them by prices for a fixed year. This is a good approach for measuring productivity (changes in quantities). Nonetheless, there are issues when you try to move this method over a very long period in time. The prices may become unrepresentative.  So you get time-related distortions. Add to this that all the time-related distortions may be different over space. After all, should we believe the relative price of wheat to oats in 1910 was the same in Canada as it was in Russia?  Variations in relative prices over space will affect this issue. Basically, you juxtapose these two types of distortions when trying to measure GDP per capita over centuries and you may end up so far in the left field that you’re in fact in the right field.

In his working paper, Lindert tried to adjust for those problems by moving to prices that were more representative. The approach he used is basically the one used by Robert Allen in his work on the Great Divergence. You create a bundle of goods that capture the cost of living in different regions – a basic bundle of goods. This generates purchasing power parities. From there, he recomputed incomes per capita with these measures prior to 1914. The results are striking: there is much more divergence between Europe and Asia that commonly proposed and the United States are much richer than otherwise believed (and were more richer very early on – as far back as the colonial era).

Now, why does this matter?

Well, consider the debate on convergence. Many scholars have been unimpressed by the level of income convergence across countries (at least until the 1980s). However, Lindert’s estimates suggest that the starting point was well below what we think it was. In a way, what this is telling us is that many puzzles regarding the “catching-up” of poor countries may be simply related to poor data. Imagine, for a second, that we could redo what Lindert did with many more countries at a higher time frequency. What would this tell us? Imagine also that this new data would confirm Lindert’s point, what would that entail for those entangled in debates over development?

Basically, what I am saying is this: most of our debates often stem from poor data. If a simple (and theoretically sound) correction can eliminate the puzzles, maybe our task as economists should be to stop bickering over advanced theory and make sure the data is actually geared towards testing our theories!

Percentages that Fairly Scream and, “Catastrophe” is a Greek Word

The WSJ of 7/9/15 shows a comparative table for some European Union countries of spending on pensions as a share of GDP. This comparison denotes roughly the drag effect that payments to retirees has on the whole national economy. To no one’s surprise, Greece tops the list with 14.4%. Germany is at 9.1%. This may seem like a small difference but when it’s turned into actual, absolute figures, the difference becomes downright striking. They scream!

The 5.3 percentage points difference can be applied to both countries’ GDPs (or GDPs per capita, same thing in this case). The International Monetary Fund gives Germany’s GDP per capita for 2014 at about $46,000 and Greece’s at about $26,000*. Pensions cost Germany $4,150 annually for each man, woman and child. Pensions cost Greece $3,400 annually for each Greek. It does not look like the Greeks should be able to afford this kind of disproportionate burden.

Suppose Greece’s pensions took the same bite out of its GDP as Germany ‘s does out of its GDP, 9.1% . In this scenario, today, the Greek economy would have about $1,400 each year unspoken for for each man, woman and child. This money would still be available for spending, as it is through pensions. It would also, however, be available for both public and private investment.  That’s $1,400 each year; that’s a lot by any standard. That’s money needed to rejuvenate the Greek aging economic plant.

How realistic would such a change be, involving raising the legal age of retirement, I mean? The Germans’ and the Greeks’ life expectancies are virtually identical ( 80.44 vs 80.30, in CIA Handbook). There seems to be a little wiggle room to move there. Note that raising the age at which people can claim a pension is doubly beneficial: It reduces the number of pensioners while raising the number of workers who support the pensioners. Some will argue that raising the age of retirement is a pipe-dream in a country such as Greece where there is chronically high unemployment. I think this reasoning is wrong. Many Greeks don’t find a job because investment in Greece is insufficient. People need tools to work. What is certain is that the current dishonest Greek government policies, soundly supported by the exercise of a majority of Greeks’ votes cast, are not going to draw foreign investment. The money to improve both Greeks’ chances of employment and their productivity will have to come from within. One significant source is described above: Close the pension option for one or more years to healthy Greeks. It will provide both ready investment money and confidence abroad.

Note that raising the legal age of retirement is a purely political decision. The Greeks can do it any time they want. They can do it overnight. Perhaps, there will soon arise a political party in Greece that will proclaim the truth: It’s not the mean lenders, it’s us!

This is a fairly simplistic reasoning, I know. The general age of the population places constraints on the practicality of raising the age of legal retirement (but an older population also makes it more desirable; think it through). I have heard leftist demagogues on National Public Radio argue that the big bite that pensions take out of the Greek economy is not the Greeks’ fault, that it results more or less directly from the fact that Greece has an old population. Sounds good but the fact is that the Germans are, on the average, quite a bit older than the Greeks (Median age of 46.5 vs 43.5 according to Wikipedia.) Don’t believe experts on NPR, not even on simple facts!

Alternatively, the Greeks could begin collecting their moderate taxes like the Germans instead of like the Italians. They might also remember that “catastrophe” is a Greek word.

* The figures are “PPP” meaning that they take differences in buying power in the two countries into account.