Post economic meltdown : France vs US two opposing recipes for recovery

Redwood City

December 16th 2012 

Nicolas (*),

I‘ve been living in the Silicon Valley for sixteen years. You live in Lyon, arguably the best spot on earth when it comes to fine food and wine. I’m keeping an eye on what’s happening in France, and I know you are in touch with what’s happening in what is my current country . I believe we can agree that the differences in vision and strategy to resolve the economic crisis that fell on us are incredibly striking. And this comes with consequences: as we are experiencing a slow but consistent recovery, France is going deeper and deeper in a financial and moral meltdown. 

USA and France : so much in common, so many differences

We shouldn't be surprised. Sure, France and America have a lot in common. They share extremely deep historical roots, have never been at war against each other (there are not that many other examples among the “civilized” countries) and have been fighting side by side in almost every conflict in which one of them was involved. Both nations pride themselves on their active promotion of tolerance and freedom. Both respect free enterprise and private property.

But. Even if France is one of the largest European countries, it sits on a land seventeen times smaller than the USA. Its history goes back twenty centuries, coming to existence in its current shape during the Middle Age, growing up in the Renaissance, surviving a few kings misusing their absolute power, reinventing itself through several major revolutions and bloodbaths, agonizing during WWI (one of every three male citizens ended up dead or crippled), disintegrating during WWII and a gruesome occupation, reconstructing itself while losing its colonies and former glory and power, while under the threat of a nuclear war, with a Soviet Union at its door, and a communist party gathering over 20% of the voters within its borders.

Economic policy as a pie recipe

Let’s refocus on the economy and consider it as a pie. Looking at France, this pie is not growing, however what is discussed is how the pie should be shared. This comes with several consequences:

• If someone has a larger portion, others will see their share as reduced. The consequence is a profound distrust of the “rich people”. This is deeply rooted in the French psyche, perhaps also a consequence of living for too long under the rule of an aristocratic class.
• As the surface of the pie remains constant, the role of the government is to make sure that everyone gets a share. This leads to a system based on massive welfare programs.
• At times of crises, the government will be expected to manage the decreasing size of the pie. By sharing.

Now let’s come back to the Land of the Free. For most American citizens, the discussion is around the growth of the economy, hence, how to enlarge the pie. The country is expected to become richer and richer. Consequences follow:

• If someone accrues large wealth for himself, he is usually very well considered, as he is contributing to enlarging the pie. Since this will be benefit to all, nobody really minds if his size is bigger.
• When facing an economic crisis, the focus is on maintaining the size of the pie, and even making it bigger to resolve the issue.

At times of troubles, the scenarios differ:

• Day one: a big disruption occurs. Markets collapse on both sides of the pond.
• Day two: in America, companies “reduce expenses,” followed by a flow of unemployed people filing for unemployment. In France, hiring is stopped, but employees keep their positions, as firing them would be in the short term more expensive than getting rid of them. France shares the shrinking pie while America modifies the sharing.
• Day three: US companies deliver better results and start hiring again. French companies are still in the red, increasingly so, and as the economy supports the growing ranks of the unemployed (the one who could not find a job because nobody is hiring) taxes go up. As a side effect, the US companies that are too weak to survive in a bad economy disappear.
• Day four: America is back on track, everybody is happy until the next crash. New businesses are created, taking the place of ones that disappeared. In France, the deficit rises and companies benefit from the wellbeing of the US and world economy, but are getting weaker because they have less cash at hand than they should. They could hire new workers, but are afraid that the next crisis might kill them if they have too many employees.

That’s the theory. Reality is, of course, more complicated as the models are not so crisp and pure, but you get the idea. Will this stop? Well, it will have to at some point. The real question is: when?

Marc,

(*) Marc and I decided to work this blog as a correspondance between two french-born men, living 8.000 miles apart. Our inspiration (Marc's idea actually) comes from "Les Lettres persanes" of Montesquieu (1721). Except that, in the Montesquieu masterpiece, the two correspondents were imaginary. It was just a matter of style. Marc & I are real. Well, even if we add our talents, we won't be 5% as gifted as Montesquieu. That's the bad news. The good news is that we're alive and writing. We don't know each other that well. We bumped out in each other while he was board member of a company were I was CFO. But most of the boards were over the phone so we maybe met twice or 3 times. Nevertheless, we managed to keep in touch, mainly from Marc who posted comments on the economic blog I handled for 3 years for a french national newspaper. Let's not pretend we're enemies or opponents. As far as I can tell, we're sharing a strong core of views and values. But there are enough discrepancies between each others to challenge ourselves enough. It won't restrain us to post papers outside this correspondence. I'll keep on posting my favorite kind of papers : long with a load of stats and data.