France Vs. United States: An Argument From Economics

Mirror of Justice has been hosting an interesting debate about the efficacy of the French economy and social system. On the one hand Greg Sisk argues that Catholic social teaching should not support economic systems that lead to a dominant centralized state and widespread mandates on the private sector. To make his case, he provides a litany of problems with the French system, including a stagnant economy, high unemployment, an ingrained entitlement mentality, and "a failure to contribute much of anything in the way of creative increases in wealth to the world economy". On the basis of such a record, he concludes that:

"[I]t vitally important to regularly remind all of us that faithful recognition
of our responsibility for the common good, a sincere and sacrificial endorsement
of the preferential option for the poor, and a firm commitment to the central
role of the family in society should not shade into uncritical support for the
secular welfare state nor be confused with a political platform for new
government programs, economic controls, and regulations or unfunded mandates to
be imposed on employers"

On the other side, Thomas Berg argues that the picture painted by Sisk is little more than a crude caricature. He notes that France has "lower abortion rates, longer life expectancy, lower infant mortality rates, and lower homicide rates" and argues that the welfare state has something to do with this, especially since it subsidizes childcare. Health outcomes are also better. Berg then notes that French productivity is similar to the US, and that the French are merely choosing to work less to enjoy more leisure and family time.

To assess these issues, let's use a tool that is somewhat out of fashion in these days of truthiness and relativism: facts and figures. First, Sisk claims that growth in the US is three times that of France. But to arrive at this figure, one must cherry-pick the data carefully (I suspect he looked at a single year-- I could also do the same, and find years were French growth was higher--2000, for example). In fact, since 2000, the average growth rate in the US was 2.7 percent, as opposed to 1.9 percent in France. Higher, but not astronomically so.

To go further, let me introduce a simple arithmetic exercise, highly useful when examining these kinds of empirical issues. The cleanest measure of living standards is GDP per capita, or real GDP (Y) divided by population (POP). Let H be the total number of hours worked, and L be the number of employees. We can therefore state the following:

(Y/POP) = (Y/H) * (H/L) * (L/POP)

What this does is break income per capita into three distinct terms. First, Y/H is real output divided by hours worked, or productivity per hour. H/L is hours worked per employee, or average hours. And L/POP is the ratio of employment to population. When one of these ratios changes, living standards move. This is a simple but powerful tool.

Now let's look at the numbers (the source for everything is OECD). I will restrict my analysis to the last decade, and compare France and the US. First, living standards are lower in France; in fact, GDP per capita in France is just over three-quarters that of the US. But what causes this? How about productivity, that core driver of growth? No, productivity per hour in France is pretty much on par with the US. Berg is right. The difference is explained by the other two factors. Hours per worker are, on average over the past decade, about 8 percent lower in France, and this has been made a little worse after the introduction of the 35-hour work week. But again, this is largely a social choice in France. The French are willing to accept lower living standards in return for more leisure and family time. Not all happiness is monetary!

So far so good. But there is a dark cloud on the horizon. The third category, the ratio of employment to population, is substantially lower in France, standing at about 84 percent of the US rate. [A quick aside: France might be catching up, as its private sector employment grew far more rapidly that in the US over the past decade]. Delving deeper, France's low employment rate is particularly pronounced among the young and the old. And this is where there is some merit to Sisk's arguments. It is indeed possible that generous welfare benefits, including inducements to early retirement, induce some to exit the labor force. At the same time, France's rigid employment protection legislation creates a dual labor force comprised of secure insiders and agitated outsiders. This is the cause of much of youth unemployment, and, more ominously, it lies behind the frustration of the North African immigrants who cannot pry open the labor force.

But this does not mean the welfare state should be dismantled. If you look at some of the greatest success stories in generating employment over the past two decades in Europe, you will find small-government countries like Ireland and the UK, but also big-government countries like Denmark, Sweden, and the Netherlands. What binds these countries together is not the size of the welfare state, but the underlying incentives. Here's a hint: all of these countries have low employment protection laws, and few regulations on the product market. Take the Danish system. If you are unemployed, your replacement rate is nearly 100 percent, as you gain from welfare pretty much what you earned at work. But this is not a free gift! The unemployed are forced to take part in labor market programs, and the welfare runs out after four years. Also, it is pretty easy to be fired in Denmark, as the cost of being unemployed is much lower. Somehow, this system works, leading to a dynamic economy combined with generous social protections.

One other thing to note, from the point of view of solidarity and the preferential option for the poor, is that both poverty and inequality are extremely low in countries like Denmark and Sweden, but quite elevated in the US and the UK. The poverty rate in the US is around 17 percent, as opposed to 7 percent in France, and 4 percent in Denmark. Gini coefficients (measuring income inequality) tell a similar story. Something to bear in mind.

Let's conclude with some data on social outcomes. For education and health, the US spends a lot, and gets a poor return on its money. On primary education, the US spends $8,305 per student, while France spends $4,939. On secondary education, the US spends $9,590; France spends $8,653. In terms of outcomes, the upper secondary graduation rate in the US is only 75 percent, while it is 81 percent in France. And math scores (based on the 2003 PISA test) are extremely low in the US: 483 versus 511 in France and an OECD avearge of 507.

The story is similar when it comes to healthcare. France spends $2,401 per capita on health, while the US spends $4,497 (almost double!). In return, life expectancy is 68.1 in the US, 71.5 in France. Infant mortality: 4 per 1000 in France, and 7 per 1000 in the US. And maternal mortality: 8.8 in France, and 10.5 in the US. I guess socialized medicine has some benefits after all! [One more aside: the inefficiency of the US system stems from the fact that the insurance companies cream off a huge skim as middlemen, but that's a story for another day.]