What If The French Are Our Future? What Will Happen To The US If We Can’t Ever Cut Government Spending?
You may not have been to France but it is unlikely that you have missed the images from Paris.
It has been hard to miss: the country has been frequently shut down by raucous protests and, even when not, there are piles of garbage that have become so immense they that now rival the statuary and local landmarks.
The only thing worse than the heaps of refuse and attendant rodents might be when these trash mountains are set alight amid the clouds of tear gas and flares set off by angry protestors.
Intentionally or accidentally doesn't much matter - burning garbage is still burning garbage and it is in the middle of the famous avenues and boulevards:
Who exactly is winning here?
"Clouds of gas and burning offal" isn't what is commonly associated with the City of Light, let alone in springtime and yet here we are.
The reason for all this fun? Well, as you likely already know, the French are noisily and, in at least some cases, violently protesting against their President's plan to raise the retirement age from 62 to 64.
(worth pointing out that garbage collectors' retirement is being raised from 57 to 59)
Out favorite part of this multiple month long drama was when the strike was finally called off about a week and a half ago and all the obligatory articles were written about how long and difficult it would be to remove this garbage.
Only once those articles were printed the French garbage collectors announced the a new rolling strike that will commence immediately and go forward without an end date. En grève!
The good news is that fewer and fewer people are showing up to the "maximum" protests and polling is slowly moving against supporting the endless disruption and civic destruction.
This entire drame is certainly causing eyebrows to be lifted elsewhere around the world. Most developed Western workers typically work till at least 65, after all. One can only imagine what the average developing world worker thinks about some of the richest people on earth setting their own city on fire and running a large scale and uncontrolled rodent breeding program.
It is all very French and amusing unless you live in or are planning on visiting France at which point it is both horrific and very sad.
What to say about this? Why is this important?
Well, narrowly on France:
We think that, unlike in the past, President Macron will be successful where many of his predecessors failed. He has his faults but the current Macron is, perhaps to a fault, determined and strong willed.
However, we also think President Macron made a major mistake in side-stepping the French Parliament, the National Assembly, and using a constitutional trick to avoid an open vote he would likely have lost.
We won't go into it in detail but when democrat leaders lecture their citizens on the importance of democracy but then turn around and ignore democratic norms, procedures and values then that is arguably even worse than never caring in the first place.
The latter has the virtue of being both less sanctimonious and more honest. The former is precisely the fuel that anti-democratic populist fires thrive on.
As we have pointed out before:
Caring about democracy means caring about it always, not just when it suits your interests. That is sort of the whole point.
This isn't the first or even fifth time this newsletter has had to make this point in its short history and that is a bad, bad sign omen for Western political dynamics.
More usefully and broadly, however, we think that the Parisian piles of refuse are important because:
The French future of reduced welfare state benefits will almost certainly be yours and ours.
It isn't just that tough decisions are coming, but rather that we are likely on the cusp of changing our entire postwar welfare state
For well over a year we have argued that you should expect a nasty combination of higher costs and less Federal largess will lead to lower returns for stocks and company profits.
To this we would also like to add that most of the readers of this newsletter should operate with the expectation that the postwar welfare state is no longer sustainable and will be, slowly and likely inefficiently, overhauled in the years to come.
The key is to hope that the system it is transformed sensibly and carefully. Frankly, we are nervous on both those fronts but change is certainly in the offing.
The facts are clear and make it inexorable: an ageing and shrinking workforce combined with lower economic productivity is simply making it too difficult to sustain the postwar welfare state model. This system was, of course, predicated on a very different demographic pyramid and a few lower life expectancy of the average worker.
This has been going on for years of course but as the streets of France demonstrate, the crunch is finally upon us. Our contention is, France is just early. Get ready.
The same inflation protected benefits for a longer number of years with fewer new workers and less productivity is a tough nut to crack. Something has to give.
The fires on the streets of France are symptomatic of the stakes. We agree with the protestors about that aspect of it but we disagree that burning your city is the answer or that the French state has much choice in the matter.
That is because it makes eminent sense that the retirement age should be cut. The average French retiree today lives till 82.5 and 20+ years of pension benefits is likely more than any rich state can afford, even one as wealthy as France.
The change pushed by the Macron government is many things but it is hardly cruel.
And that is even before we get to the fact that the French pension replaces 74% of income in perpetuity. That is far above OECD average of 62% and also well ahead of Canada (46%), the UK (58%), the Nordics (lower 50s%), Germany (53%) and the US (51%).
Individual countries can spend their money as they like and obviously there can be differences between what gets prioritized but a 20%+ difference is quite an outlier and likely an unsustainable one.
After the Second World War, Western welfare states were set up when there were over 40 workers per retiree and the average citizen passed away right around the retirement age. It is an unadulterated positive that people who have worked hard can enjoy their retirement but there are real consequences. As the number of workers per retiree falls to 2-something heading towards eventual parity it is impossible to expect nothing to change. This gives new meaning to the expression "here for a good time, not a long time." We are doing the opposite.
So, change is coming to France and that will be quickly followed by elsewhere in Europe and other developed countries. It is only sensible to plan ahead and get ready. France is not the only country with similar demographics and a penchant for (perhaps different) political pyrotechnics.....
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