Presentation made by Cécile Philippe, President of the Institut économique Molinari, at London’s Institute of Economic Affairs, on October 27, 2015.
IEM’s mission is to reconcile people and the economy.
The Institut économique Molinari (IEM) is a French-based European research and educational organization established by Cécile Philippe.
It publishes research papers analysing public policies from an economic standpoint.
Its mission is to point out the dangers arising from growth of the state and their consequences on our daily lives in terms of freedom and prosperity.
The institute is named after the Franco-Belgian economist and journalist Gustave de Molinari, who dedicated his life to promoting this approach.
Our understanding of the current situations and trends leads us to the firm view that the most important reform to be implemented in France is to free our labour market.
– Labour market reform or “work class actions”
Government reform first requires labour market reform. The latter must precede any extensive reform of public spending for the simple reason that it will be hard to suggest lowering civil service staff levels (or changes of status) if the only alternative is an obstructed labour market. In addition, it will be impossible to conduct reforms allowing for a true rebalancing of pay-as-you-go pensions if extending the number of years worked is seen as a way of displacing the young.
In any event, labour market dynamism is a key element for emerging from the crisis in France, especially since the financing of our social model (health care, retirement, unemployment, family support) relies on our society’s ability to provide enough jobs.
In no other area can the damage caused by an interventionist and costly government be seen so clearly. For decades, the labour market has become more rigid, with nothing arising to offset the adverse effects of any of the prevailing laws. If our market is ranked 107th among 144 countries by the World Economic Forum, this is simply because it combines every handicap: a high minimum wage, a strict legal work period, an unemployment insurance monopoly and an exacerbated level of job protection, not to mention high payroll taxes and levels of assistance.
Possible reforms: work class actions and the opportunity to negotiate contracts at the company level.
– Welfare state reform
A look at the numbers shows them to be dominated by the state budget. This may give the misleading impression that the budget should be targeted first. We are convinced that it is only in a second phase of reforms that it should be dealt with. Why? Because the state has grown partly as a consequence of our impaired labour market. And one of the reasons our labour market is dysfunctional is that our welfare state is financed by employer and employee contributions to social security (health and pensions)
Healthcare reform: abolition of the monopoly held by the compulsory health insurance system
Unless the health care system is liberalised beforehand, current cost containment efforts lead inexorably to bureaucratic rationing of care and, over time, to long waiting lists for French patients. The French government should draw upon the lessons of the reform carried out in the Netherlands in 2006, with abolition of the monopoly held by the compulsory health insurance system. This is not as far-fetched as it may appear. Even Noble laureate Jean Tirole dares to discuss this in a 2014 paper published by the Conseil d’Analyse économique et social (CAE).
Pension reform: capitalisation, public funding and an end to defined benefits
This is a two-part reform, since the French pension system involves the private sector on the one hand and the public sector on the other hand. As regards the latter, the state is it own insurer, and we can easily see that it has behaved very carelessly, with no balanced budget since 1974. The private sector has lacked a strict pay-as-you-go system since 2006, with the state having to borrow to service pensions. According to the latest estimate from the Stiftung Marktwirtschaft, a Berlin-based think tank, the implicit debt – the amount that should have been saved to pay pensions – has become enormous, now standing at 388% of GDP.
Consequently, what should be done first is to promote capitalisation systems and stop discouraging savings (cf. Jean Jaurès). Defined benefits should then no longer be promised within the pay-as-you-go system. Finally, public entities should be required to fund public servants’ pensions as soon as new employees are hired.
– Abolition of the precautionary principle: cost-benefit analysis
Rhetoric from activists has increasingly promoted the superficially unobjectionable “precautionary principle” under which no innovations are allowed in the absence of absolute certainty regarding possible harm.
In practice, however, the absolute absence of anything that may be harmful is a poor guide to public policy. While no innovation can ever be perfect, our key concern should be whether or not it creates problems of a lesser order than what existed before. In contrast, the seemingly sensible “no risk” precautionary principle effectively bans better and less damaging ways of doing things, such as the use of chemicals and biotechnology in agriculture. It therefore comes at a significant social, environmental and economic cost. Sound cost-benefit analysis should be promoted instead.
– Targeting of the nanny state: lighten tax and regulatory burdens
Each time public authorities, in their fight against “bad habits,” prohibit a product on the official market, they create opportunities on the black market. And each time they decide to raise taxes or tighten regulations, they make illicit trafficking and the shadow economy more profitable.
To fight the shadow economy, governments are intensifying repression. But they are leading themselves astray, because this does not deal with the causes of the problem. The fight against the shadow economy should take a completely different form. It should restore competitiveness and vigour to the official economy and labour market. To achieve this, there is no other choice but to lighten tax and regulatory burdens.
Cécile Philippe is President of the Institut économique Molinari.
