The elections in France demonstrate the power of faulty economic analysis, and more generalized problems with arithmetic, to shape ideas and possibly the future of not only a nation, but a continent.
The United States has faced similar problems with its debate over Social Security, in which the majority of Americans were convinced -- based on verbal and accounting trickery -- that the program is facing serious financial problems when the baby boom generation retires. (It isn't).
In France, Nicolas Sarkozy, the right-wing candidate, has taken the lead after Sunday's election with 31.2 percent of the vote, against Ségolène Royal, the left-of-center candidate of France's Socialist party, who garnered 25.9 percent. They face a runoff election against each other on May 6.
The general theme that has propelled Sarkozy into the lead is that the French economy is somehow "stuck" and needs to be reformed to be more like ours. It is also widely believed that France needs to be made more "competitive" in the global economy, since competition is tougher now in a more globalized world.
New York Times columnist Thomas Friedman has been the most popular proponent of the idea that French workers must lower their living standards because of the global economy. "All of the forces of globalization [are] eating away at Europe's welfare states," he writes . . . "French voters are trying to preserve a 35-hour work week in a world where Indian engineers are ready to work a 35-hour day." For Friedman and most of the pundits, this is impossible.
It is important to understand that there is no economic logic to the argument that the citizens of any rich country need to reduce their living standards or government programs because of economic progress in developing countries. Once a developed country has reached a certain level of productivity, there is no economic reason for its residents to take a pay or benefit cut, or work more hours, because other countries are catching up to their level. That productivity, which is based on the country's collective knowledge, skills, capital stock, and organization of the economy, is still there, and in fact it increases every year. To the extent that international competition is being used by special interests to push down the living standards of French or German or U.S. workers -- and it is -- it just means that the rules for international commerce are being written by the wrong people. It is a problem of limited democracy and lack of representation for the majority, not a problem that is inherent to economic progress.
Another mistake that is commonly made in this debate is to compare France's income or GDP per person to the U.S., by which France lags: $30,693 for France versus $43,144 for the U.S. (these are adjusted for purchasing power parity). But this is not a fair comparison, because the French do not work nearly as many hours as we do in the United States. Economists do not say that one person is worse off than another if she has less income simply due to working fewer hours. A better indicator of economic welfare in such a comparison is therefore productivity, which is as high or higher in France as it is in the United States.
Now for some arithmetic regarding France's notoriously high unemployment rate among young people, which shaped politics there and influenced world opinion during the youth riots in 2005. The standard measure of unemployment puts the unemployed in the numerator, and unemployed plus employed in the denominator (u/u+e). By this measure, French males age 15-24 have an unemployment rate of 20.8 percent, as compared to 11.8 percent for the US. But this difference is mainly because in France, there are proportionately many more young males who are not in the labor force -- because more are in school, and because young people in France do not work part time while they are in school, as much as they do in the United States. Those who are not in the labor force are not counted in either the numerator or the denominator of the unemployment rate.
A better comparison then is to look at the number of unemployed divided by the population of those in the age group 15-24. By this measure, the U.S. comes in at 8.3 percent and France at 8.6 percent. Both countries have a serious unemployment problem among youth, and in both countries it is highly concentrated among racial/ethnic minorities. But the problem is not much worse in France than it is in the United States.
Sarkozy proposes making it easier for employers to fire workers, cutting taxes (including inheritance taxes), pushing back against the 35 hour work week, and other measures that will favor upper-income groups and owners of corporations. These measures will certainly redistribute income upward, as we have been doing in the United States over the last 30 years. But once again, there is little or no economic evidence that these measures will increase employment or economic growth.
Royal proposes a series of measures to boost economy-wide demand - including raising the minimum wage, unemployment benefits, and state-subsidized employment. These make some economic sense, since they at least have a chance - mostly by boosting aggregate demand and spending power of consumers - to create more employment.
If France makes a historic shift to the right in this election, it will be largely due to economic misinformation.
This column was originally published by WashingtonPost.com on April 26, 2007. If anyone wants to reprint it, please let CEPR know, at email@example.com.