Look no further than France to see where the faltering U.S. economy is headed. President Obama has adopted a distinctly European fashion when it comes to expanding government and imposing tax hikes. For this, we can expect to achieve the same results as our ally on the Continent. France is "totally bankrupt," Labor Minister Michel Sapin admitted this week.
This impolitic burst of candor triggered protest from the usual mob of public-sector union employees who surround government buildings whenever there's a possibility weak-willed politicians are suggesting an end to the gravy train. The French Cabinet went into damage-control mode, downplaying the risk of collapse. Unfortunately, this governmental retreat means France won't be taking the steps needed for recovery: slashing spending and reducing the scope and size of government. Until the nation does so, capital will continue to flee, debt will increase and joblessness will rise. The unsustainable welfare state will collapse under its own weight.
The size of government spending is the larger part of France's fiscal woes, just as it is in the United States. The French public sector sops up more than 56 percent of the nation's annual output of goods and services. That leaves less for the private sector, crowding out the private spending that creates actual wealth and meaningful jobs. Just as bad is the regulatory state, which, among other things, increases the cost of labor and erodes France's global competitiveness.
More spending means more debt, so France's red ink runs deep and is drowning the private sector. The economy grew a mere 0.2 percent last year. Jobless claims came in at record highs with unemployment topping 10.3 percent. Entrepreneurs see the writing on the wall and have been escaping in droves. Outflows of capital reached about $72 billion in October and November last year, when French President Francois Hollande announced massive tax increases, including the notorious 75 percent levy on "the rich." It's a rational response to a deteriorating situation, and even actor Gerard Depardieu packed his bags for a destination with less rapacious taxes.
The tax hikes were supposed to bring in about $32 billion in revenues to shrink the fiscal deficit, but instead the capital flight has shrunk France's money supply. That leaves businesses with less money to expand operations and add employees. Given that France's labor laws have driven the cost of hiring far beyond a reasonable rate, it's no wonder 27 percent of French youth can't find a job.
Mr. Sapin is right that the French fiscal situation is unsustainable, but, like Washington, Paris insists on "deficit reduction" in the form of taxation. Massive deficits are a symptom of the underlying disease, and taxes only make the patient sicker. America and France need to make hard choices about reforming their welfare states and restoring labor market flexibility before actual bankruptcy hits.
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By Stephen Dinan - The Washington Times
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