SACRAMENTO ON THE SEINE
by Bill Bonner
dailyreckoning.com
The Daily Reckoning PRESENTS: Bill Bonner, one foot in France, the other in...California...
"California is still one of the best places in America to build a successful small business. All you have to do is to start with a large one."
-- Last week's Wall Street Journal
Down by the river, crews of workers are turning the banks of the Seine into a beach. They put up palm trees - planted in huge wooden boxes so they can be removed at the end of the summer - set up beach chairs...even dump sand. Soon, people will be sunning themselves in the center of town.
It could be Southern California.
France is the world's 5th largest economy. California, if it were a nation, would be ranked just ahead of it.
France has a little more land...and more than 20 million more people, but each Frenchman produces a little less than the average Californian.
Both have palmy trees and sunny places in the south; both have balmy people and shady characters in the north. Californians and French each think they are exceptional. Both have huge holes in public finances. And neither France nor California has a reserve currency of its own with which to fill them.
The French believe their centralized "model" is unique, exceptional...and better than any other.
Americans have recently become even more conceited; they think their system of democratic capitalism is superior to that of other nations - and especially superior to the French, whom they see as hopelessly socialized.
Not only do Americans think their system is superior, they believe it is destined to prevail over French social welfarism...in the same way that Marxism was once thought to be destined to triumph over the West...by immutable, historical determinism.
And yet we, who live and work under both systems, find the sting of the one lash little different from the sting of the next. It is the ways they are alike that irritate us; it is the ways they are different that please. Neither in Sacramento, Baltimore nor Paris can a man go about his business as he pleases. Even in family matters, the state thinks it knows best. In France, a woman who gives birth to her third child is required to stay away from work for 6 months to take care of it. In California, a new law provides state payments to an employee who stays away from work for the purpose of "bonding with a child new to the family."
An entrepreneur may find it easier to start a business in California and pay slightly lower taxes...
...on the other hand, he will not eat as well, the women he ogles will not be as slim...he will not be permitted to drive as fast...nor to smoke in restaurants...and the building he works in will probably be uglier.
Americans delude themselves that their system of free enterprise was what beat the collectivists in Russia and now races ahead of the rigid social welfare model in France. They think they see victory signs in every pair of golden arches and Schwarzenegger movie they spot overseas.
They practically broke out into applause when Jean-Marie Messier consciously Americanized his French water company, turning it into a aggressive, debt-soaked entertainment conglomerate.
And then, of course, Vivendi did what leveraged American companies did following the blow-out of the early 2000s; it almost went under. And then, it was the French turn to applaud. The American system of cutthroat capitalism didn't work, they said.
Colbert was one of the first great centralizers in France. He, too, created the first public pension system. In 1673, he put into place a system that would pay sailors to do nothing after they reached a certain age. The plan was intended to combat piracy, because the old sailors often took to that devilry after they could no longer get honest work; it was the only way they could feed their families.
Later, Otto von Bismarck took up the idea and created the first modern social welfare state in Germany in the late 19th century.
"We'll take care of you," said the central planners in Paris, Berlin...and later, Moscow.
"This was the exact opposite of the idea [which came, notably, out of the Scottish Enlightenment] that a man should take care of himself," explained Michel at lunch the other day.
"America was founded on the idea that the individual knows what is best for him and should be free to seek happiness in his own way."
These two ideas - central planning on the one hand...and individual planning on the other - were what separated America from the rest of the world. Americans think their model triumphed over the central planning model of the Soviet Union...and is now beating the pants off Europe's lighter, softer versions. But it is just the opposite. Even in America, no one really argues against central planning anymore. That's why there is a Federal Reserve System...a progressive income tax...social security...the SEC...OSHA...EEOC...FDA...and all the rest of the expensive impedimenta of a modern welfare state. Colbert, Bismarck and Marx have won, in other words, not Adam Smith.
Returning to California, we find in the land of the free the very problem that now preoccupies the French. And if you were planning to attend the Avignon Festival, the world's largest theatre hullabaloo, this year - forget it. It is closed because France's entertainment industry workers are on strike. They don't care much for their government's pension reform suggestions, and have let it be known in the traditional way.
Lacking a reserve currency, France must ultimately find an honest way to pay for the social welfare promises it has made. Or it must cut back on the promises. Those promises will cost $7 trillion, says Gerard Maudrux. Finding less than that under the seat cushions, the prime minister has proposed a longer period of work and set off a period of social unrest.
Meanwhile, the Golden State has the same problem. When the going was good - in the late '90s - public pension benefits were increased 50%. Typically, no money was set aside to pay for them. Instead, California operates a miniature version of the U.S. Social Security system. It is pay-as- you-go, without a printing press in the basement to help out when the going gets tough.
The state receives about $65 billion in taxes. It is scheduled to pay out about $20 billion more than that next year. Over the next 2 years, the total shortfall is expected to be nearly $40 billion. Balancing the budget would require either a 47% tax increase...or a 35% tax cut. (We know which we would choose...but nobody asked us.) Most likely, Californians will get a little of each...and more public debt...and a new governor, too.
California readers know the story better than we do.
We write only to offer sympathy; they are not alone. Their state...their nation...and their situation is not so different, after all. Even a private company, General Motors, is in a not-so-different predicament. Unable to pay its pension promises, GM borrows...just like France and California.
Somehow, the same bad brew was taken up all over the world. Whether called French dirigisme...the quest for shareholder value...or dynamic American capitalism, they all have the same bitter aftertaste: neither voters, retirees, nor shareholders are likely to get what they were promised.
Bill Bonner
Editor's Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author of “Financial Reckoning Day: Surviving The Soft Depression of The 21st Century” (John Wiley & Sons) due out in September. |
