Economic education and opinions about free markets

Public opinion about economic policy in France and the United States are very contrasted. In France, free markets are viewed very suspiciously and government intervention is required left and right. In the US, it is about the opposite, the government should stay out of any business and no tax can be justified. I find it very frustrating to talk to people (not economists) from both countries as they seem conditioned to believe steadfastly in their view. In the case of France, I was nice shocked to hear an elected politician claim that social security could easily be fixed by taking the money that "lies" in the banks.

Radu Vranceanu and Jerome Barthelemy try to relate beliefs in economic paradigms and economic education. Through a survey, they asked French Internet users about their knowledge of basic economic principles, their views on pro-market reforms, along with various demographic and education indicators. The survey was linked from a business school's website, so answers come from a population likely to be more interested than average in economic issue, and probably more likely to be open to pro-business reforms than the average French citizen. Still, it is clear that economic literacy is a god predictor of open-mindedness towards free markets. I bet it is just the opposite in the US.

Another French experiment with work hours going bad

The French have a special knack in messing with labor markets. The last spectacular failure was the law that limited almost everyone's workweek to 35 hours in the hope this would spread the total hours to more people, lead to more employment and solve a chronic unemployment problem. Well, it did not and lead to loss of productivity and ridiculed controls. And I doubt many economists were surprised. With the election of Sarkozy, this law was quickly scraped and an equally ridiculous law from the other end of the spectrum was introduced.

Pierre Cahuc and Stéphane Carcillo discuss the French policy of making overtime work tax exempt. One can really question what Sarkozy had in mind with this policy, as the adverse consequences are all too obvious. First what is overtime is easily manipulated, and suddenly many regular hours became overtime hours. Second, if the intend was to increase the total hours of work, it was bound to fail if most of the overtime is coming from workalcoholics who would work no matter what the wage is. This is why you need to tax them instead of subsidizing them. And Cahuc and Carcillo find that indeed total hours hardly changed. So what all this amounted to is a generous lump-sum subsidy to highly-skilled workalcoholics. Great.

Why Greece will never make it: self-fulfilling expectations about social security

Mediterranean countries have many things in common, one of them is an early retirement age. You certainly read about the uproar when the Germans learned that they had to bail out the Greeks who enjoy retirement many years earlier. Now there is much pressure on Greece to lower and delay pensions, but there is tremendous resistance from the street. The same is happening right now in France as well. Yet, initiative to delay retirement in Northern Europe or North America, where retirement age is already higher, do not generate much discussion.

Ryo Arawatari and Tetsuo Ono may have an explanation for this dichotomy: self-fulfilling expectations. The story is very intuitive. If you expect pensions to be generous, there is no point in accumulating savings for retirement, and you do not invest in education either. And once you are low skill, you will vote for generous pensions. The opposite happens with expectations of small pensions. And once you are in such an equilibrium, it is very very difficult to get out of it: people want generous pensions, and the newcomers know this and thus expect this not to change, and make the appropriate (non)investments. To change this, you need to massively lower expectations during a whole generation or more. No Greek government can have that much staying power. And neither does the French one.

About the persistence of gender roles

We live in a society where traditionally the role of the wife was to take care of the house and the children. Now that we have schools, daycare and better domestic technologies, wifes do not need to spend that much time at home and can participate in the labor market. By the principle of substitutability, when women work more on the market, men should participate more in household work, especially if the woman is the bread winner.

Sayyid Salman Rizavi and Catherine Sofer look at time use data in France. And while male household work responds to the female labor supply, it is nearly not enough to overcome century old persistence in gender roles. And yet, I would have thought that France would be, with Scandinavia, the first place where this would happen. Indeed, female labor market participation is especially high, French women are notoriously independent and yet they still manage to have more children than other Europeans. Somehow, they are really efficient, yet they still get burdened with most of the household work. There is no hope if even French women cannot make it.

The debt that would not disappear

There are sometimes papers you just cannot put down only because they are so well crafted, even though your are not really interested in their topic. I just read one of those, by François Velde.

The French government is still honoring an annuity dating back from 1738, yielding annually €1.20 to be distributed to 58 people. That seems to be a very inconsequential amount, but this particular debt, which survived several kings and political regimes, just does not die. I do not want to reveal too much about the story here, as Velde does a remarkable job at trying to understand where this annuity comes from, how it survived various challenges and how its current amount was established. Along the way, we learn a lot about politics and economics through almost three centuries of French history. A true page turner.

Policy inertia through educational elites

Some economists speak sometimes a language that is even difficult to comprehend by other economists. This happens in particular when they draw from other social sciences. An expert in this is Gilles Saint-Paul, whose major research agenda is to understand why France has chosen not to adhere to free market principles despite repeated evidence it could do better with less government intervention.

In his latest piece, he suggests that there is very strong institutional inertia that is fed by the institution itself. I see two major points in his discourse. The first is that there is an educational elite that is biased in some way and makes it thus impossible for the general public to really understand what is going on, "learn the parameters of the model." And in France this elite is anti free market. The second is that because policy choices are consistently made with a government intervention bias, people never have the opportunity to learn how good free markets actually are.

Saint-Paul certainly has a point with cultural elites being very influential in France. Where else can philosophers become TV stars? It is also true that this elite lives in some sort of utopia where the world can be perfected by intervention (and unlimited budgets). This borders sometimes on the naïveté elementary school kids display when they feel they solved the Darfur problem by writing a letter to the President (my kid did). It is also true that the French are repeatedly shown the problems of free capitalism, like in the US. And the exact reverse happens in the US, where free markets are taught and thought to be perfect, and any government intervention is evil.

Not that free markets or government control are perfect, but, as so often, there is a middle ground. And with Sarkozy, the French are getting more of a taste of free markets. And on the other side of the pond, Obama is putting options on the table that should alleviate some of the ill effects of free markets. Maybe we are now seeing this inertia crumbling.

Explaining high unemployment and low mobility in Europe

There is an endless stream of papers trying to understand why, on average, unemployment rates are higher in Europe than in North America. I have reported here about several of the recent ones, and there seems no shortage of new explanations. In fact, if one were to build a model with all those explanations, one would probably be left to explain why after all the unemployment rate is not even higher in Europe...

So what is the latest explanation? Peter Rupert and Etienne Wasmer pick up the ball where several left it: high unemployment is due to low mobility: Europeans are much more attached to their region and are less willing to move for a new job. This begs the question as to why. This calls for a model that explains both unemployment and mobility, based on some friction that differentiates North America from Europe (and does not involve taste shocks, the catch-all for the unexplained). Rupert and Wasmer argue that differences in unemployment insurance benefits and taxes are not sufficient to explain the differential, one needs also to factor in commuting costs. While commuting time is a little shorter in, say, France, fuel costs are much higher, which explains the shorter commute and the lower mobility.

Calibrating this labor search model, Rupert and Wasmer find that indeed they can explain both the unemployment rate and mobility differentials. But I have a feeling this is not the end of the story. If the cost of commuting is so high, why not move closer to the job? European housing markets are much less liquid than in the US. Why? It seems the economic force discussed here should make them more liquid.

Monaco set to expand

Monaco has a tiny territory and is bursting. To expand, it seems to have nowhere to go but the sea, à la the Netherlands. And this seems exactly to be the plan: filling up parts of the Mediterranean sea on the shores of Monaco at a cost of €5 billion, to deliver 275,000 square meters of land. This is about US$ 3,000 a square foot. Monaco can do better than that.

The area around Monaco is quite hilly, so I suspect the water is not shallow. This makes it particularly difficult to fill. Also, there may be environmental issues with marine life. I think it would be much simpler to simply expand into existing land, i. e., buy it from neighboring France. And France should be happy to sell.

France should be able to get a good price for it. And it is not losing much. Monaco is a tax tax haven, but not for French nationals. Indeed, after France embargoed Monaco in 1963 because of tax cheats, Monaco had to give in and let France tax its citizens living in Monaco. So no tax revenue loss for France, a apart from the non-French residents that would fall out of its jurisdiction.