World

Socialism Is Harder than You Think

Scott Sumner

Suppose you wanted to switch to socialism — what would be the ideal place to do so? You'd want a country with extremely high quality civil servants.

That would be France.

You'd want a country where socialism is not a dirty word, and capitalism is.

That would be France.

You'd want a country with the Socialist party in power, a party that was committed to enact the ideas of Thomas Piketty.

That would be France.

So how did things work out in France, when they tried to adopt a Bernie Sanders/Thomas Piketty approach to taxes?

IN THE eyes of many foreigners, two numbers encapsulate French economic policy over the past decade or so: 75 and 35. The first refers to the top income-tax rate of 75%, promised by François Hollande to seduce the left when he was the Socialist presidential candidate in 2012. The second is the 35-hour maximum working week, devised by a Socialist government in 2000 and later retained by the centre-right.
Each has been a totem of French social preferences. Yet, to the consternation of some of his voters, Mr Hollande applied the 75% tax rate for only two years, and then binned it. Now he has drawn up plans that could, in effect, demolish the 35-hour week, too.
Mr Hollande's government is reviewing a draft labour law that would remove a series of constraints French firms face, both when trying to adapt working time to shifting business cycles and when deciding whether to hire staff. In particular, it devolves to firms the right to negotiate longer hours and overtime rates with their own trade unions, rather than having to follow rules dictated by national industry-wide deals.
The 35-hour cap would remain in force, but it would become more of a trigger for overtime pay than a rigid constraint on hours worked. These could reach 46 hours a week, for a maximum of 16 weeks. Firms would also have greater freedom to shorten working hours and reduce pay, which can currently be done only in times of "serious economic difficulty". Emmanuel Macron, the economy minister, has called such measures the "de facto" end of the 35-hour week. 
At the same time, the law would lower existing high barriers to laying off workers. These discourage firms from creating permanent jobs, and leave huge numbers of "outsiders", particularly young people, temping.
For one thing, it would cap awards for unfair dismissal, which are made by labour tribunals. Laid-off French workers bring such cases frequently; they can take years and cost anything from €2,500 to €310,000 ($2,700 to $337,000) by one estimate.

Unfortunately, while France is moving away from these policies, the US is likely to move some distance in their direction. Of course there are differences. Our minimum wage is still lower than in France, and our top income tax rate is closer to 50% in states like California and New York. But all the momentum is with the socialists, who are especially numerous among the younger voters.

Socialist ideas are superficially appealing. Paul Krugman (who favors very high income tax rates on the rich) often says that reality has a liberal bias. Actually, reality has a neoliberal bias, and if you don't take incentive effects into account, you may end up disappointed.

Back in the US, Sanders' single payer approach also has problems:

A costing of Mr Sanders' plans by Kenneth Thorpe of Emory University, using more conservative assumptions, found that the plan was underfunded by nearly $1.1 trillion (or 6% of GDP) per year. If Mr Thorpe is right, higher taxes will be required to make the sums add up. In 2014 Mr Sanders' own state, Vermont, abandoned a plan for a single-payer system on the basis that the required tax rises would be too great.

Vermont is one of the most liberal states in the union. Now think about the fact that they gave up on the idea, despite it having been previously approved and signed into law. Then think about the concept of rolling out a multi-trillion dollar plan at the federal level, soon after the only experiment at the state level failed to get off the ground.

Is that evidence-based liberalism, or wishful thinking?

This post first appeared at Econlog.

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