Efficiency is over-rated: lessons from France

french ministry of finance

Ministry of Finance building in France, not a country known for its minimalism in public administration. Partly suspended over water, the building features speed boat access and a rooftop helipad.

I’ve been writing a few posts about the priority of taxing and spending more. My argument is that anglophone policy elites exaggerate the importance of issues like efficiency and targeting, while under-appreciating the importance of sheer bigness.

On reasonable assumptions about welfare, the benefits of redistribution and public services can easily outweigh the costs of even highly inefficient taxes. Meanwhile, pro-poor redistribution can occur even in the context of regressive spending funded by regressive taxation. As I have said, the first principle of social democratic taxation is not efficiency or progressivity; it is MOAR.

In this post I want to come at the efficiency argument from another angle – an international comparison.

But not just any country, I want to go right to the opposite extreme of advanced economies, right into the heart of big government darkness… France.

Not only does France have far higher taxes than Australia has (about 60% higher!), it has more numerous taxes and more cumbersome taxes.

They have a photocopier tax. A pornography tax. An R-rated cinema tax. A legal defence tax. A billboard tax [good]. A mineral water tax. A television sports tax. A ski lift tax. More here.

These type of little taxes, rather obviously distortionary, are anathema to Australian tax discourse, at least among the “serious” policy elites (for example, central agency bureaucrats, mainstream think tanks, centrist policy economists, economic journalists, elite business people and so on).

Even when these folk support introducing a tax, they often do it on a “one in, one out” basis. The introduction of a land value tax must be balanced by the abolition of stamp duty, for example.

No such taxation timidity for the French. France has high stamp duties AND high property value taxes on owners AND high property value taxes on occupiers. All cumulative.

But that’s not all: France is a notoriously regulated and bureaucratic country, with arcane mazes of cumbersome and complex rules. Whereas Australia is 14 on the World Bank’s Ease of Doing Business rankings, France is down at 32. According to Cato’s economic freedom index, Australia is ranked 9 while France languishes at 50.

What about industrial relations? Australian unions have been denuded of meaningful power. Even run-of-the-mill industrial action by NSW transport workers was banned, not because it was wasn’t warranted, not because it hadn’t followed proper process, but because it would inconvenience people. (Yes, that’s what strikes do!) The union promptly affirmed its respect for the legal authorities and called off the strike.

Meanwhile in France, they take a different approach:

Workers at collapsed French car parts maker New Fabris threatened on Sunday to blow up their factory if they did not receive payouts by July 31 from auto groups Renault and Peugeot to compensate for their lost jobs…

“The bottles of gas have already been placed at various parts of the factory and are connected with each other,” CGT trades union official Guy Eyermann told France Info radio.

“If Renault and PSA refuse to give us that money it could blow up before the end of the month,” he added

As the above link noted, another French union strategy is “bossnapping”. It’s like the opposite of a lock out – you lock the boss in. They are released when they sign the desired “agreements”. And they get away with this stuff! France is different.

France has the highest rate of work days lost to industrial action in the OECD. This is over eight times Australia’s strike rate – over ten times the rate in the most recent data I could find (2014).

So, relative to Australia, we have a country with 60% higher taxes, clunky regulations, an economic freedom ranking 41 places lower, and a radically more bolshy industrial relations culture with an order of magnitude more strike conflict.

Given what we all know about the dreadful economic damage these things inflict, how much does big government set France back?

About four places in the international rankings of GDP per capita, apparently. That’s Australia’s edge over France on this one. Both countries are higher than the United Kingdom, Japan and New Zealand; both are lower than Germany, USA and Norway. The GDP per capita difference between Australia and France is about 7%.

Or to put this carnage in stark pictorial terms:

aus vs france 1

Shocking.

At this point I want to pause a moment to reflect on the tragic loss of all the economic output that has fallen victim to the wrecking ball of big government. RIP.

But even this meaningless difference in economic output per capita is more than explained by the fact French workers have more leisure time – which is the deliberate intent of French policy.

With a legislated shorter working week, employed workers in France work about 12% less per week compared to Australia. They have five weeks annual leave. They can retire at 62 (although this is increasing).

French GDP per hour of work – labour productivity, and probably a better measure of economic welfare in this context – blows Australia out of the water. It’s 22% higher.

That’s right, despite all of the heavy handed tax, regulation and industrial action; France has far superior productivity to that of Australia. Roughly equal with the USA, it’s among the top handful of countries in the world, as are Norway, Denmark and Belgium, also heavy taxers.

If hikes in taxes and regulation are as destructive as some folks suggest, surely we should see something in the output statistics. And if their impact is small enough to be completely drowned out by other differences between the countries, it would suggest they don’t warrant nearly the magnitude of attention they receive. They aren’t substantively significant, not fundamental to driving the wealth of nations.

Return to the policy discourse in Australia and its strange phobia towards tax and regulation. We have all heard the right-wing populists claim even the most moderate and sensible new tax will be economically devastating, with a former Prime Minister claiming an Australian city would be “wiped off the map” by a carbon tax.

But there is another trend of overwrought fears about taxation, less deranged but still pernicious, which comes from the technocratic policy elite. There is way too much wringing of hands about the supposedly dreadful distorting effect of a marginal change in this or that tax, usually based on some dubious assumption-heavy modelling exercise.

Frankly, I just don’t believe this stuff matters very much for overall wellbeing in the real world.

France is not just a small shift on the dial towards big government; it is a different ballpark of heavy-handed taxation and regulation. If we cannot even see all this in the headline production statistics, the impact of any single given policy, let alone a marginal change in a parameter of any single given policy, is just too trivial to get worked up over.

What really does matter?

There are 774,000 Australian children in poverty, two million people can’t afford the dentist, more than 100,000 homeless. Things like that really matter.

Let’s stick to the main game.

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