France, shame on rich, poor management, mutual untrust, taxes and welfare system

Lyon, France
Dec 22nd

Dear Marc,

As it seems we've survived the Maia's 'end of the world' prediction, I can reply to your last note about economic policy as a pie recipe. I'll answer on the core aspects of the matter but I'll also focus on a very specific topic. Because that debate is currently raging in France (in the political world and, for a large part, in the media world, making the headlines in the most viewed evening news) : tax level, and the way we should "manage" rich people and famous people fleeing in more rich-welcome countries (Switzerland or Belgium). All the ingredients are gathered for a great buzz : famous people (actors), relation to the Nation (is it legit to leave your country to avoid paying too much tax ?), large revenues. But it's also highly related to the economic policy or, to take your analogy, Marc, the pie recipe.

France budget tanked, welfare 60% of national budget, no mutual trust, everlasting unemployment

Let's add some context here. French budget is tanked, debt is high, nothing really different compared to US (metrics are quite comparable, debt is almost 90% of GDP). But, as you noticed, the positions are extremely different when you come to welfare. Three stats here :

• 45% of individual yearly revenues are absorbed by taxes or social charges to cover governmental machinery and welfare spendings
• Governmental spending (including welfare) equals 56% of our GDP
• 60% of our national budget (welfare + Nation budget + local administration budget) is absorbed by welfare (mainly pensions and health)

That's huge. Obama Care is a boy's toy compared to our welfare system, born in the ruins of post-WWII. Only a few small countries in Northern Europe (Denmark, Norway) have comparable numbers (actually slightly more.)

Other major issue : people don't trust each other in France. A worldwide survey is being performed every 4 or 5 years with the same set of questions submitted in each country to approx 1,000 persons. At the question : "Generally speaking, would you say most people can be trusted or that you need to be very careful in dealing with people ?", possible answers are "Most people can be trusted or "can't be too careful".

Here are the results for the last survey (2005 - 2007) :

Scandics people are trusting each other strongly which was expected. As well as a low mutual trust in former USSR countries. But a lot of surprises here :

• Iraq has the same ratio US have (as well as Japan, Germany or Italy)
• France ratio is half the US one, competing with pre-revolutionary Egypt or African countries

Why does it matters ? Because trust is business. Some research shows each percent added trust result in raises in GDP and wealth. Why ? Because you can have contracts and lawyers backup but, at the end of the day, business needs trust. You don't make good business with people you don't trust. The other outcome is that the society works better if people trust each other. The defiance we see in France in those stats result in lower or middle-class suspicion (at least) for the rich, private workers lurking for governmental workers benefits (and opposite), small business against blue chips (and vice et versa).

Same research came to the conclusion that it is not linked to France's DNA. Apparently, we trusted each other until WWII. Swedish, now at the top ranking for mutual trust, were defiant against each other back in the 20s. The level of trust is the result of History but also of economic policy. The fact that we have more than 500 different retirement pension systems is a powerful tool to fuel distrust (cause every system beneficiary thinks the other systems are more generous).

Last issue we have to address : unemployment. Let's face it and use a blunt word : this is the cancer of French Society. If the National Front (extrem-rightist party, anti-Islam, anti-arabs, anti-immigrants , used to negate or minimize Jewish holocaust during WWII) is close to 20%, that's one of the major reason. Basically, you have 29,000,000 potential workers in France.

• The number of "category A" (never worked at all during a month) unemployed is currently 3.1 millions, basically 10.6% of population
• If you include categories B and C (worked even an hour but way less than they wanted), the number rise to 4.5 millions, 15.5%
• If  you add categories D and E (e.g. people close to retirement so they don't have to search for a job anymore), that's 5 millions so 17.2%

But we're in crisis time, aren't we ?

The real drama is that if you go back until '97, the "best times" were in 2008 with 2 millions "hardcore unemployed" (6.7%), 3.1 millions with categories B & C (10.7%) and 3.5 millions overall (12.1%). So France is basically unable, even when economy is booming, to go under 10% unemployed. We're glorifying ourselves because we have one of the best worldwide (maybe the best one) productivity per head. Well, it's easier to play football if you downsize your team (and the opposing one) and let all the weakest (young, 50+ years old, low-educated) on the bench, isn't it ?

Gerard Depardieu fleeing his country to a low-tax haven

One of our most famous actors, Gerard Depardieu, just announced that he will now live in Belgium, no longer pay taxes in France (possible if you live 183+ days a year outside France, unlike in US where you still got to pay something as a citizen), give back his french passport and welfare card. This has been a shock as he's the latest of a streak. Some of our neighbours (even in European Union) are very welcome with French People leaving France : they offer them a tax rate even lower that the one applied to their own citizens. The French Prime Minister said that Depardieu is "a prick", a lots of celebs backed Depardieu or confirmed he's a moron. Lots of politics said he's everything but a patriot. Some say people on tax exile are "rats leaving the ships", some others that they'd do the same would they be in their shoes. All of this is is page 1 in newspapers and makes headline story in evening news. Me ? Well, I'm not in their position and I don't like being too affirmative telling what I would do in this or that situation.

Let's try not to get ahead of ourselves and get some background. French economy is tanked, no growth, high deficit, high debt, high unemployment. Elections have taken place in May 2012 and leftist François Hollande won. As you described, Marc, the main thinking in France is to share the pie, not to enlarge it. This is especially true with leftist party.

Says French President : "I don't like rich people"

The government decided to massively raise taxes to reduce the deficit as asked by Germany and rating agencies. It decided that reducing Nation's and welfare spending is impossible (the conservative government tried to reduce them between 2007 and 2012 but failed). So taxes have been raised, mostly for the richest, and for 2 years. Hence the temptation for businessmen or actors to flee in Belgium (Brussels is 1h30 away from Paris in high-speed train) or Switzerland (Geneva is next to the french border). About the spending, almost everyone from politics to the media through the population wants them to be reduced so we could reduce taxes. Well-known CEOs have made a paper in the most famous French newspapers to say that a year ago. The problem is when you want to get the specifics : do we cut into military ? justice ? pensions ? health refund (75% of individual health expenses are covered by national mandatory system) ? Nobody wants to tell. Everybody wants to have the cake and eat it too. Sure it would be possible to improve the global spending efficiency (it's what a politician invokes when he says we must downsize spending and he's asked by journalists on what and he does not want to be unpopular - 100% of them - by saying 'yeah, let's cut on health refunds'). Choices have to be made. If we want less taxes and a more lightweight governmental sector, we need to be prepared to pay more for school, health or save more for pensions by ourselves.

About the tax raising, question is : are we too tough with wealth ? Well, the current President said a few years ago that he "does not like rich people". In another interview, he said that being rich starts with $75,000 yearly revenues (in other words, he is part of the rich now so he should not like himself, right ?). His behavior toward the rich has greatly evolved since, during the campaign and after the election but one can't forget where he comes from.

You said, Marc, that there's a profound distrust toward the rich in the French psyche and I'll give you that much. My feeling is that it comes from centuries of catholic religion being official in France. It's somewhere in the Holy Bible that "it will be more difficult for a rich to enter the kingdom of heaven than for a camel to go through the hole of a needle". That leaves some marks and, indeed, French people are suspicious  of the rich.

But I also doubt that most of our rich (or high revenues) are "love-able". The problem is that, in France, to build a fortune or to enter in the inner circle of very high revenues, you need to :

• Inherit from your parents
• Graduate from specific schools (2 or 3)
• Have a rock solid political network and use it
• Have worked as a "sherpa" or spin-doctor for a politician at the beginning of your career : at lot of blue chips CEO nominations, even for stock-exchange listed companies where France is not shareholder, need to be "backed" by government

Add to this that French capitalism has a level of endogamy : CEOs of Blue Chips are at the board of other Blue Chip companies. This is the same in US but to a much higher extent in France. Let's take an example : the French richest man, Bernard Arnault, has a $25B fortune (do I need to mention that he lives in Belgium ?). He inherited from his father (pretty large real-estate company) and used the cash to buy a large sinking company, Boussac. A deal was made with the Prime Minister of the time (1981), Laurent Fabius, now Secretary of State, so Bernard Arnault could buy Boussac at a very-low price in exchange with the promise to "save the jobs". He cut the company in pieces and sold them with a very nice bump. He was asked later on about the promise on the jobs he did not respect. He said that, once he had sold the companies, the promise could not be respected. No harm (for him). Then, he used the cash to buy LVMH and managed to raise it to worlwide #1 of luxury industry.

I don't say that Mr Arnault does not have talent or insight : he does. But let's compare this with the two co-founders of Accor Group. This is a hotel chain including Ibis, Novotel, Four Seasons, Sofitel, Pullman and many others. $8B yearly revenues, 4,500 hotels, 145,000 employees, all of this built on their own with no political network or dummy promises. What is the fortune of the two co-founders ? $200M each.

The problem in France is that the yearly revenues or fortune is not related to personal credit, risks taken  or talent. And people are no fools : they see that (with more or less accuracy). Take Xavier Niel, the rising star of French Capitalism. He did not attend the "good" schools, did not succeed because of political friendship, never worked for a politician, was a son of middle-class average couple. He started in the sex industry and "pink Minitel" (Minitel was a french-designed ancestor of Internet in the 80s). He's now compared to Steve Jobs. That is wrong because he did not invent a product but a business model. He launched a low-cost telco company (Free), paying himself a very reasonable wage but his fortune is worth $5B. And I never heard anyone complain about the guy (unlike other rich people) except 5% extreme-leftist that are opposed to any property rights.

Rich Americans are a lot about philanthropy (Gates "Giving Pledge" program, building a hall or an aisle in the college where they graduated) : that's very rare in France. Mr Arnault is a sponsor for his passion : contemporary art.  That's nice but that's not a way that is recognized as "giving back to the community". So I wouldn't say that French don't like the rich. This is much more complicated and I would say that French are waiting for rich people they would be able to like.

Have a merry Christmas, my friend, waiting for your views on this,

Nicolas QUINT