Economist, Entrepreneur, former member of the Economic Council of the Bank of France, Paris.
Since 1970, I have dealt with industry: first in the administration, as rapporteur general of the Commission of Industry of the 7th plan, then in major companies. In 1994, Philippe Séguin, then president of the National Assembly, named me to the Council of Monetary Policy.
My intervention will be centered on three simple ideas, unfortunately little or not all shared.
- The State wastes the financial resources of the nation in its public interventions. This leads to a scarcity of financial resources for more productive activities, in industry in particular and in agriculture.
This should lead us to a new approach to infrastructure programs.
The aim is to improve the economic profitability of infrastructures and public interventions in the economy.
- When I studied economics at the Institute of Political Studies, we read the manual of Samuelson, an American professor of economics who later received the Nobel price. There, he explained the Keynesian principles of multipliers and investment accelerators. But I was very surprised to learn that the nature of the work done was unimportant. In other words, one could make intelligent investments or dig holes and refill them, with the same consequences.
Today, after more than 40 years of experience, I totally mistrust this assertion. I find it unconscionable to promote infrastructure programs without measuring in depth their actual utility and economic profitability.
Why is profitability necessary?
In my opinion, Keynes’ analyses depended to a large extent on the monetary situation of his time. The peg to gold was still a reality, even though the link to the various currencies was going to become more loose. The world monetary supply was obviously halted. The idea of increasing public spending thus had the effect of injecting liquidity. In a time of monetary scarcity as was the case in the aftermath of the war, and given the dimension of investments to reconstruct the economy, that did have, without a doubt, a beneficial impact on economic activity. The monetary supply created by public spending acted as a loan to various economic activities, which needed just that to take off. That has been observed in all periods of history.
Our situation today is very different. There is a monetary surplus everywhere, as a result of the lax monetary approach of the United States over many years, more or less between 1990 and 2007. Then came the monetary crisis caused precisely by those excesses. But all the monetary authorities, American and European, continued to inject considerable sums of money in the programs called “quantitative easing”.
There is such a monetary excess today, that nobody knows where to invest. Uncontrolled public-sector spending is increasingly directed into non profitable activities, and financed solely by a systematic increase in indebtedness.
All public-sector spending that is carried out without profitability has a dramatic “crowding-out” effect: a fall of investment and of private consumption. In the graph, we see that the worldwide GDP is around 50 trillion dollars, and is covered by a stock market capitalization of about 100 trillion dollars. One can reasonably estimate, that 200 trillion dollars would be necessary to run the entire world economy without the risk of monetary scarcity. That leaves from 300 to 400 trillion dollars that are rotating around themselves, without the slightest contribution to the real economy.
Thus, we are in a situation which has never occurred before, on the one side a financial sphere rotating upon itself, and on the other a productive sphere whose nominal and real profitability is “taxed” by the financial sphere. This levy is organized in the greater part of the so called industrialized countries directly through taxes, but also through elimination of a good part of human resources (unemployment). The unemployment is generally attributed to competition from low-cost countries, but the difference in costs would not be so high, if the levy on the productive sector were less.
The money supply pumped by the Federal Reserve and the European Central Bank only aggravates the phenomenon. Almost all the “quantitative easing” goes into the financial sector, and is totally useless for the productive sector;
Micro-economic approach to the role of great infrastructure projects
The macro-economic and monetary approach in the present situation does not help us know what to do. However, it is possible to draw up a typology of infrastructure, defined in terms of their goal, their means and their success. The different plans we have had have nearly all failed systematically, when they applied to productive structures. However, we have noticed some exceptions when the State was a client, or when the financial masses needed exceeded the capacities of the economic players.
- Horizontal interventions
The first type of intervention involves subsidizing production prices. The typical example is the Common Agricultural Policy, which produced the “admirable” result that German agriculture today is more efficient than the French agriculture for which it was designed.
The research tax credit (CIR) and the tax credit for competitiveness and employment “CICE) are simply indispensable tax exemption niches to compensate for a devouring taxation system.
- Plans by sector
- Steel plan
- Machine tool plan
- Calculation plan
- Digital plan for all
They were all dramatic failures. They all led to the elimination of nearly all the companies, which had sometimes been spectacular successes (BULL), but were not sufficiently profitable to take on the risks inherent to all industrial activities.
To recapitulate, all the nationalizations of the industrial sector carried out in 1981 were all massive failures.
The nationalization of banks were ot huge successes (see the Crédit Lyonnais) and led to the present situation of France’s monetary policies.
- Clientèle policies
To my knowledge, this is the only policy carried out by the State or by local governments which was somewhat successful. The sectors involved are essentially those which come under the state’s sovereign policy: aeronautics, space, ship building and military equipment.
Other public entities allowed for an efficient industrial policy. The RATP (the Paris transportation network), and in some cases even the SNCF (national railway company) developed efficient industries. That was also the case of many companies belonging to the top exporting companies in the world. I will given just one example: Desgranges and Huot. For many years, this company which produced primary pressure standards had very strong ties to the National Laboratory of Tests (LNE), which tests all products going onto the market. Their collaboration, which spanned more than twenty years, led to that company becoming the world leader, and the Laboratory itself becoming world leader of pressure measurements.
- The choice of leaders
As soon as the capital of the companies belonged to the State, the leaders were chosen from among the administrative intelligentsia. These people knew very little about the reality of companies, but considered themselves empowered to promote changes that were more justified by a need for “communication”, than by industrial realities.
The flaws of public interventions and why they are inefficient
I would like to finish this expose by seeking to understand why State interventions are almost always wasteful.
- Unquestionably, the most successful program of the past 50 years was the electro-nuclear program. Launched under the 7th plan of Valery Giscard d’Estaing, it was aimed at giving our country a large energy independence. That goal has been reached, but a less visible result is that it created pressure to lower the oil prices. The investment was extremely large, but the operating costs gave France a considerable advantage.
In contrast, all the other programs suffered three recurrent evils as concerns the French administration’s intervention.
A late start because of political conservatism. Then Prime Minister Raymond Barre declared that the State had been forced to launch a telecommunications plan and that only the State could do it because the investments required were so great. That meant ignoring the fact that in all the countries in the world, the telephone systems and later the telecommunications were developed by the private sector. Telephone equipment was expensive, because it involved catch-up investments and the late start was due to the postal and telephone administration (PTT). The same remark holds for the highways.
Spreading too thinly and complexity
With the interventions by sector, two flaws co-exist.
Spreading too thinly:
Certain investments often had to be shared by several suppliers. That led to an increase in costs and especially a poor image of French industry.
Technical specifications very often do not take into account aspects of marketing. An example from my personal experience: in 1988, the ONERA (French aerospace lab) and an American company were developing a lightning detection system. The ONERA had developed an excellent system, superior to the American one on all levels. The only problem: it cost twice as much as the American system, and the latter had completed production two years before. Therefore, the American system, although imperfect, was used to equip the meteorological stations of the French weather system, Meteo France. While that system was later improved upon, the French one was never built.
Every successful investment must be used as much as possible
One of the most frequent behaviors of the French political class is to want to copy what is successful elsewhere, or to acquire what is considered as a good window case on their action. One example is the TGV. The first TGVs were undeniably a success. The reasons for investing in the Paris-Mediterranean line are fully known, and are explained by the necessity to build new lines because of bottlenecks getting out of Paris, and especially because of the populations concerned. Paris, Lyon and Marseille represent one third of the French population. Because of the success, everyone wanted to have his own TGV: first in the West, where the population is much smaller, then in the East, where it even ran at a deficit. For more than ten years now, the technical and commercial success became a losing system.
To conclude, you will have noticed that I am not favorable to an ideological intrusion of the State in the economic domain, not because it cannot have an essential role. However, I think that the State must intervene when the sums required are out of the reach of private investors, or when the development of new products would call into question the survival of the company (ie, when an possible failure would be fatal). It was in such a situation that we had to develop French aeronautics, and successfully so.
The Tunnel under the Channel should have been financed, at least partially, by public investments. The risks were undeniably very high. It was also undeniable that the tunnel would transform Franco-British economic relations for more than 100 years, and that profitability had to be calculated not with an industrial vision of 10 to 20 years, but of 100 years. Paradoxically, and influenced by Mrs. Thatcher, it was the only large investment which would have needed public intervention, and which was financed by the private sector.
It is impossible for the public powers to define, a priori, the needs of a complex society. The first plan had defined the essential needs for the reconstruction of France. But as of the Sixth plan, and even more the Seventh, we had to to abandon authoritarian planning in favor of indicative planning. I think that we need greater economic freedom today. As long as the State and public entities engage in activities with zero, if not negative, profitability, the economic private sector as a whole will lack dynamism. In addition to taking responsibility for its own profitability, it will have to support the increasingly negative profitability of public sector activities.