France: The New Model for Economic Recovery

The New York Times ran an interesting story lauding the ability of France to implement its $37 billion economic stimulus package. French government is far more centralized than in the U.S., giving it a bureaucratic leg up. It also has been aggressive implementing industrial policy (called “indicative planning”) for decades.

Indeed, a career in the bureaucracy is considered a highly respectable career path, and French bureaucrats are routinely recruited from the top universities. So, the human capital and the centralized organization are there to make the implementation of a stimulus package work. Unfortunately, it’s also helped strangle the French economy, although this point isn’t addressed by the reporters.

So, what are the French doing with their stimulus dollars? Sprucing up castles.

“Their job? Maintain in pristine condition the 800-year-old palace of more than 1,500 rooms where Napoleon bid adieu before being exiled to Elba and where Marie Antoinette enjoyed a gilded boudoir.

“Besides Fontainebleau, about 50 French chateaus are to receive a facelift, including the palace of Versailles. Also receiving funds are some 75 cathedrals like Notre Dame in Paris. A museum devoted to Lalique glass is being created in Strasbourg, while Marseilles is to be the home of a new 10 million euro center for Mediterranean culture.

“All told, Paris has set aside 100 million euros in stimulus funds earmarked for what the French like to call their cultural patrimony. It is a French twist on how to overcome the global downturn, spending borrowed money avidly to beautify the nation even as it also races ahead of the United States in more classic Keynesian ways: fixing potholes, upgrading railroads and pursuing other “shovel ready” projects.”

In short, the French are pursuing “make work” projects that add little to the economic capacity of the economy to produce goods and services (other than low-dollar impact tourism). These projects are keeping the French employed, but that’s about it.

Nevertheless, since all the stimulus money will be spent in 2009, the article claims that this spending will help the French economy stay afloat.

“The Organization for Economic Cooperation and Development expects France’s gross domestic product to drop 4 percent from the peak of the economic cycle, far less than the 7.4 percent plunge expected in Germany, the nation’s economic rival.

“The economic decline and loss of jobs are also likely to be significantly milder than in Spain, Belgium and Britain, according to the group, a Paris-based intergovernmental research and policy advisory agency for the world’s industrialized countries. (By comparison, the American economy is expected to shrink by 3.5 percent before starting to grow again.)”

Notably, the French economy will perform better relative to other European countries, not the U.S. Our recession will still be milder, and we will emerge from it faster. So, even with the efficient implementation of the stimulus package, France’s economy will still not perform as well as the U.S. economy. But, there’s more.

The article notes that the French unemployment rate is now 8.9 percent (lower than the U.S.), and with the stimulus package it will peak at 11.5 percent by 2010. But, according to the Organization of Economic Cooperation and Development (OECD), France’s unemployment rate exceeded 9 percent in 2004, 2005, and 2006 before dipping to 8.3 percent in 2007. So, France’s economy has been chronically anemic (in terms of employment). It’s unclear the stimulus is having much impact at all. It’s GDP growth has also consistently lagged the U.S.

Moreover, the long-term cost to the French economy will be high becuase of its byzantine welfare state and incredibly inflexible labor market regulations.

Paying for all those jobless French will not be cheap. Under French job regulations, unemployed workers are guaranteed up to 67 percent of their former salary and can collect as much as 70,000 euros ($98,000) annually in benefits for two years.

Indeed, without major changes in government policies, France faces costs that will probably be crippling in the long run. “We’re insulated from the shocks, but the next generation will pay for it,” Mr. Boulhol warned.

Alas, France isn’t much of a model if we are interested in promoting economic growth and employment. It is, however, an excellent model of how a welfare state can strangle job creation and employment even during the best of times.

Too bad the New York Times reporters didn’t dig into this part of France’s recent economic history.