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AB 2000 studies

Alain Boublil Blog


Supply-side policy : the true and the wrong

In France, the government in order to set out its economic policy and to praise its results bases itself on a theorical concept. It consists of making financial transfers under diverse forms in favor of enterprises in order to reestablish the main economic balances and notably to come back to full employment. They are them which must offer to the economic agents the goods and the services. Through their support, the supply-side policy allows to reaching these objectives. But to measure its effect and to assess its efficiency, it is important to place that action in comparison with the other tools the State has at its disposal.

Historically, it was not the role of the State but of the market to do that. The constatation, after the great 1929 crisis, that this principle was not any more valid, has leaded the American administration to follow another model, conceived by the English economist Keynes. The increase of the public expenditures focused on investment allowed to making growth rebounding and to creating jobs. The impact was superior to the incurred expenses thanks to the multiplier put in front by the economist. A concept was born: the economic policy. After no government, especially during the reconstruction period after the war, will deprive from it.

Without challenging the necessity of these tools, another school represented by the American economist Milton Friedman, will later explain that it is through the management of the evolution of the money supply through the fixation of the interest rates that the equilibriums will be maintained and especially the price stability, put into danger at that time by the successive inflationist shocks. But the commitment of the State in the recovering of the equilibriums is not anymore challenged except by a very small minority. Keynes and Friedman are still the two sources of inspirations of the decision-makers, the first ones regarding the budgetary action, the second ones through the monetary policy given to central banks whose independence, along the time, has been reinforced.

In France, the supply-side policy has been used for the first time by the Mauroy government in 1982. After the measures favorable to the purchasing power which were included in the economic program of the left which had won the elections in 1981 and the nationalizations of several industrial groups, the State has decided to launch capital increases and to offer privileged financing conditions in order these enterprises can restructure themselves and realize the necessary investments for their future development. The dominant doctrine at that time was that there was an international division of labor and so doomed sectors. The State answer, through these financings, has been that there were no doomed sectors but only plants which had to be modernized. To do that, Keynes money was put on the supply side. The trade balance, excluding energy exchanges, progressively improved and remained with a surplus until 2002.

But that success has been short-lived with the increase of foreign acquisitions by French groups and with the de-localizations. The trade deficit in goods has again increased with market-shares losses and the reduction of industrial jobs. In 2012, the government has decided to have again recourse to a supply-side policy through a massive reduction of the social charges with the tax credit in favor of the enterprises competitiveness (CICE). This measure was following the instauration of another tax credit giving a privileged fiscal regime to the expenses in favor of research and innovation.

That new supply-side policy has had a first consequence. Tax increases on household occurred to reduce the budget deficits as a compensation of the reductions offered to enterprises. Growth from 2013 has been affected in an already difficult international environment after the sub-primes and the euro crisis. But the worst was not there. That policy was dedicated to all enterprises and not only to these which needed a support to cope with international competition. The share of the industry in the GDP was then inferior to 15% and most of the measures in favor of supply have profited to big retailers, to the banking sector and to touristic activities.

That logic has been kept until now with an acceleration of the de-industrialization and a continuous degradation of the trade balance which has just beaten all its records, excluding energy. During the last twelve months, it has overpassed 60 billion euro. Regarding employment situation, it has only few improved. Unemployment rate has fallen back around 7%, mainly due to the demographic evolution, the spread between retirements and the arrival on the market being reduced. The number of jobseekers is still superior to three million. That policy did not bring significant results as it is generally claimed.

So, must it renounce to the supply-side policies? No, because the mistake made in France has been to use it indifferently in favor of all the enterprises and not to focus it on industry and digital services. The State yet has at its disposal the tools with financial institutions able to serve as springboards. But along with affirming its role and claiming its responsibilities, it has renounced to be a real “Strategic-State”. Announcements regarding start-ups and some construction projects of plants must not make illusion as testifies it, after more than ten years, the lack of improvement of the goods foreign trade and of the number of jobs in industry. 

The paradox, it is that the founding nation of liberalism, the United States, and which had always condemned the State interventions, has just, itself, adopted a powerful supply-side policy. But to the difference of France, it is targeted and includes precise objectives as re-industrialization and the safety of the supply chains. It is based on subventions and the gift of privileged financings to investment projects in well identified industrial sectors. The Inflation Reduction Act, under the pretext to protect itself against prices increases, is a large operation of making up shares in the internal market and of financing innovation. The estimated budget for the next five years is 500 billion dollars. The Chips Act has as an objective to re-localize on the American territory plants producing electronic components and has been the purpose of a large approbation by the Congress.

The threat constituted by China is also used as an alibi because the American enterprises which are very highly localized in this country. They could be the main victims if the current tensions were getting worse. Exchanges between the two countries will remain very important. It is the reason why the main economic decision-makers of the Biden administration went to Beijing at several reprises these last months.

We don’t yet observe the results of that policy on the foreign trade deficit of the U.S. because the investments which are still on the making have not yet leaded to the creation of new operating production capacities but as in France at the end of the Eighties, the change will occur sooner or later.

The supply-side policy so has become an efficient tool to reestablish the major economic equilibriums but not at any condition. If it is targeted by a Strategic-State, it is a powerful factor of rebound and of jobs creation. If, to the opposite, as in France, it only consists in simple transfers in favor of the enterprises without that any condition was included for their attribution, it contributes to the improvement of their margins but very few to the re-industrialization. It is, besides, one of the main causes of the increase of the public deficits and of the State indebtedness.                  


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