Tuesday, June 12, 2012

Quote of the Week (Hollande is an idiot edition)

Things are starting to get real (again) over in Europe, with Spanish bailouts and Greek elections and please nobody look at France because we promise things are totally cool there. So this week's Quote of the Week naturally comes from that nape of the woods, where things are starting to get seriously bizarre.


"France's new Socialist government is planning to ramp up the cost of laying off workers for companies in the coming months, its labour minister said on Thursday after data showed the jobless rate hit the highest level this century at 10 percent.

'The main idea is to make layoffs so expensive for companies that it's not worth it,' Sapin said in an interview with France Info radio."
                                         - France Labour Minister Michel Sapin, via Reuters

That's a nice idea and all, except that it likely won't work and may in fact be utterly counterproductive.

As Mish Shedlock points out, the main problem here is that by trying to make it very expensive to fire someone, all the French government is doing is making it effectively very expensive to hire someone... therefore, it won't ever be worth hiring anyone unless that person is being woefully underpaid versus the work they're producing.

The plan here suffers from a basic misunderstanding of why businesses hire people and when. A business typically will hire an employee only if that employee brings more value to the firm than he requires in return as compensation--if you effectively increase the amount that the company must pay (either upfront or down the road), then the company will never hire in the first place (unless the government forces the hiring decision upon them... hey, maybe that's next).

Under the French proposal, unless a company can accurately determine its revenues and staffing needs into an infinite future, the risks of having to lay an employee off simply become too great, to where a company will hire only when it becomes absolutely necessary.

If the goal here is to utterly devastate the French economy as it exists today (which may or may not be a bad thing, depending on who you ask...), then the policy is right on target. Otherwise, it's a disaster.

Unfortunately, it might not even be the worst proposal to have come out of France since Hollande's election, given the new president's decision to lower the official retirement age back to 60 from 62. This comes at a time where most countries around the world are increasing their legal retirement ages, with good reason. This chart from The Economist helps to explain why.

There are some inconvenient truths that need to be spoken, but that many in our government (and seemingly everyone in the French government) dare not speak. The simple fact is that as we all live longer, and as our birth rates slow, we are gradually moving to a place where there are more non-productive people living in the world than there are productive people. When you lose this basic balance, the burden falls more and more on governments to provide, but their ability to pay is directly tied to that same shrinking pool of productive workers (i.e. taxpayers). That's bad.

I'll leave the last word on this topic to Malcolm Gladwell, who way back in 1990 penned an article for The Washington Post opining that the budding anti-tobacco campaign could have the perverse effect of effectively bankrupting our nation's pension funds. The funds are probably headed that way anyway, but Gladwell's point nevertheless provides intriguing food for thought. From Gladwell's piece:
"Prevention of disease is obviously something we should strive for," said Health Policy Center economist Gio Gori, who has conducted cost-benefit analysis for a variety of health programs. "But it's not going to be cheap. We will have to pay for those who survive."
The lingering question remains, how will we in fact pay for those people? In France, the answer still seems to be "who cares"? And that's a problem. Here in America, we need to be careful to avoid a similar response, lest we end up where Greece and Spain now find themselves.

[Mish Shedlock]
[Malcolm Gladwell]

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