France facing the future

As the pandemic spread around the world last year, French President Emmanuel Macron asked former IMF chief economist Olivier Blanchard and me to preside over an independent commission on the challenges for post-Covid society. Recently delivered to the Elysée, our three-part report focuses on global warming, inequality, and demographic change. Here are answers from Olivier and I to a few questions about the report and its main conclusions.

What motivated you to write this report?

Jean Tirole: Our societies are facing unprecedented challenges with the Covid-19 pandemic and its consequences. Emerging from the crisis, dealing with rising unemployment and bankruptcy risks, fostering economic recovery, or managing public and private debt will be complicated objectives for every government. In addition, the structural difficulties that prevailed prior to Covid-19 are still with us and have often been exacerbated by the pandemic. That is why, when President Macron asked us to chair a commission to address these structural issues, with the assurance that we would have complete freedom in selecting the commission's members and that we would be able to present our findings independently, we enthusiastically accepted.

Olivier Blanchard: We chose the 24 members primarily for their expertise in economics. They belong to very diverse intellectual and political currents. They are divided into three equal groups: French, European non-French and US-based. One of our members, Emmanuel Farhi (Harvard), sadly passed away last summer, just hours after participating in one of our plenary sessions. This report is dedicated to the memory of this exceptional man and researcher.

What are your recommendations on global warming?

JT: The urgency of global warming requires rapid and large-scale action, and success will largely depend on technological advances. We must avoid increasing the costs of ecological transition, which will be high in any case, by opting for measures that are not effective. The good news is that people are clearly concerned about global warming. The bad news is that they are reluctant to bear the cost of the ecological transition and its consequences on their way of life. At the same time, the lack of transparency on the cost and effectiveness of different measures does not make the discussion any easier.

The public's attitude towards green taxes is determined more by their visibility than their effectiveness. Although unpopular, carbon pricing is essential to the transition because not only does it encourage greener behavior and stimulates green R&D in a transparent and efficient way, but, perhaps more importantly, it allows better choices to be made and overpriced solutions to be ruled out. To implement a fair carbon price, it needs to be expanded. The existing system is weakened by abusive use of exemptions and subsidies for fossil fuels. We must also be particularly concerned about potential losers, such as modest households living in suburban and rural areas. To avoid environmental dumping in other countries, this tax must be accompanied by a carbon adjustment at our borders. This is the only way our societies can face the challenge of global warming in the long run.

OB: The report also points out that governments need to encourage fundamental research breakthroughs to reach net-zero carbon emissions by 2050. In addition to carbon pricing, targeted subsidies, standards, bans, and incentives have a role to play. . These types of interventions are however more arbitrary than carbon pricing and more prone to lobbying, regulatory capture, and red tape, which means that we need to ensure good governance. We propose the creation of two independent bodies, if possible at the European level: the first, which we call EU-ARPA-E, would be used to finance high-risk, high-potential R&D projects; the second would be used to inform citizens and public decision-makers of the costs of different ways to achieve climate objectives.

Can France make a difference?

JT: France is responsible for less than 1% of greenhouse gas emissions. However, French public opinion largely supports measures to reduce these emissions, which is a major political asset in international negotiations. Together with other ambitious European countries, France should lead the Green Deal for Europe program and create a "climate club" with the Biden administration, which would work toward a uniform and universal carbon price for the coalition and a WTO-compatible border carbon adjustment. Membership in such a club could quickly become attractive to other regions of the world, as it would confer trade and carbon dividend benefits that would offset the costs of losing the ability to engage in environmental dumping.

How unequal is France?

OB: France's standard statistics on income, wealth and regional inequality are not bad by international comparisons. And unlike many other countries, these statistics have not worsened in the recent period. Still, France faces a huge issue of unequal opportunities, particularly in education.

In a survey of a representative sample conducted specifically for this report, the team examined the French population's views on inequality, economic insecurity, the labor market, and government policies. Overall, 73% of respondents believe that income inequality is a serious or very serious problem.. Meanwhile, 70% believe children from high-income backgrounds receive a much better education; only 44% think that all students have the same chance of going to university. OECD data and PISA scores support this impression.

What can be done to address inequality?

JT: The report proposes several areas for improvement: access to a better education, a more redistributive tax system, institutions to encourage the creation of high-quality jobs, and global taxation agreements.

More has to be spent to reduce educational inequality, and it has to be spent in a smarter way. More resources must be devoted to the education and vocational training of disadvantaged students. Teacher salaries are too low in France, too few qualified candidates apply for teaching positions, especially in the science disciplines that are so essential to obtaining quality jobs. Apprenticeships must be extended, and more needs to be done to link vocational training to employment. Young people, especially those from disadvantaged backgrounds, need to be better informed about the importance of skills, jobs, and careers available. The choice of fields of study must reflect current and future job opportunities.

The report also proposes a progressive, unified inheritance and gift tax system, based on the beneficiary. Instead of taxing inheritances at each death, the new system would tax all gifts and inheritances received by the heir, so that those who receive more are taxed at higher rates. Preferential and reduced rates based on the relationship between the donor and the heir would remain possible. France has relatively high rates of inheritance tax, but loopholes imply that the inheritance tax brings limited funds to the Treasury. The tax should have a very broad base, including most or all assets. It should only apply at relatively high levels of transmission. To increase support for such a reform, the proceeds from inheritance taxation could be specifically allocated to measures helping the disadvantaged young to acquire a good education.

OB: The ultimate source of inequalities comes from the nature of technological progress, the nature of trade, and the way firms are organized.

It is obviously essential to prepare workers for the available jobs, and better can be done to improve professional training throughout professional life. One must however go further. The traditional approach has been to take the distribution of jobs as given. It should not be so. Firms’ choices of organization, of technology, the nature of research and development projects, are endogenous, and respond to incentives. This has led the commission to explore what can be done at this margin.

The relatively light taxation of capital relative to labor induces firms to privilege machines over workers. Higher taxation of capital, or a lower taxation of labor would encourage firms to adopt more labor-friendly technology. One should however explore further avenues. Firms may be induced to offer more good jobs, more career development opportunities to their workers. They may be induced to adopt more labor-friendly technology. In that perspective, Pôle emploi should evolve to have closer relations not only with job seekers, but also with firms, exploring how they can create better jobs and offer better careers.

On the research side, one can think of giving subsidies to research technological innovations which are more likely to complement workers rather than substitute for them. We realize that awarding R&D and investment subsidies on the basis of their impact on jobs requires information public officials may not have, and that the discretionary nature of such policies raises concerns about capture by lobbies; and so much more work needs to be done. But we believe that exploring those avenues is essential to tackling inequalities at the source. Pre-distribution and redistribution can only go so far.

What are the main demographic challenges?

JT: Improvements not only in life expectancy, but also in the quality of life in old age are a major achievement. However, they imply adjustments in the way society is organized. To keep the French pension system in balance, the increase in life expectancy requires either a reduction in benefits, an increase in contributions, or a higher age of retirement. Public pension expenditure is high in France, mainly because of very low rates of working people aged 55 to 64 and a very low effective retirement age. We thus need to rethink the system, both to face current challenges and to be flexible enough to face future issues.

It is essential to begin by rationalizing the existing system. Different avenues can then be followed to introduce flexibility, to take into account differences in careers and life expectancy, and ultimately create a system that is unified, transparent, and fair.

How can the pension system be rationalized?

OB: We propose a points system that is relatively simple and transparent. Over the course of their career, workers are awarded points: for example, 100 points if their salary is equal to the average salary prevailing at the time; 200 points if it is equal to twice the average salary, and so on. If certain conditions are met, points can be awarded for periods not worked (as is already the case for maternity, caring for relatives, or unemployment).

On retirement, the points acquired are converted into an initial retirement pension. The value of each point is the same for all pensioners and adjusted annually according to wage increases and demographic changes. Low-paid workers benefit from "free points" to enable them to receive a decent pension and possibly to retire earlier. People who continue to work beyond the minimum retirement age and wait to request the liquidation of their rights continue to acquire points. The number of points they acquire reflect not only the additional period of work but also the reduced number of years for which they can expect to receive a pension.

In the event of a transitory shock, whether it be macroeconomic fluctuations or the bulge in the age pyramid caused by the retirement of the baby boom generation, or Covid-19, there is a case for allowing deviations from the rules. The most obvious way to do this is to create an independent body to manage and monitor a reserve fund.

The report also emphasizes the need for penibility to be treated at the firm or industry level. Early retirement for hard jobs can obviously be desirable, but the retirement benefits between the early-retirement date and the legal age of retirement should not be mutualized. Making firms accountable for early retirement has several benefits: it forces them to offer better working conditions to their workers (to reduce chronic diseases) and it prevents them from off-loading to other industries the extra costs their activities impose on society.

JT: We are convinced that such a reform, accompanied by measures designed to increase the demand for older workers by companies, more flexible work conditions for older workers, a better prevention and treatment of chronic illnesses, and the ability of older workers to work longer if they so want, will cushion the blow from demographic changes and allow the system to adjust over time The report also urges better integration to address low labor force participation among the immigrant population, especially women. Several measures can be implemented to address this problem, which has additional consequences for the balance of the pension system.

If solutions exist, why has there been so little progress?

OB: Reforms are often poorly designed, explained, and implemented. The devil is often in the details, so it is essential first to analyze the challenges, the positive aspects and the negative aspects of different policies. This requires the contributions of a number of experts from scientific and social disciplines.

Without public support, no reform has a good chance of success. We have seen this often in France in the recent past. From the outset, particular attention must be paid to perceptions, to the likely winners and losers. This implies a comprehensive approach. We have tried to provide an economist's view of the facts and possible policies, to consider what needs to be done to make these policies acceptable to the public, and to make practical suggestions for implementation.

JT: The three challenges on which we have focused – global warming, inequality, and population aging – raise complex technical and economic issues. Many of our decisions about how we respond must be made in a context of great uncertainty. But these three challenges are also time bombs that raise fundamental questions of equity both between and within generations. Their immediate effects are much weaker than their long-term effects, which encourages policymakers to delay. But we must get to work now, because the cost of inaction will be much greater in the future.

Some key recommendations:

Climate

- Carbon pricing is essential to encourage greener behaviors, and to stimulate green R&D in a transparent and efficient way.

- Exemptions and subsidies for fossil fuels must be quickly phased out.

- Potential losers, such as modest households living in peri-urban and rural areas, should be compensated.

- To prevent environmental dumping, the carbon tax must be accompanied by a carbon adjustment at borders

- R&D must be accelerated. An independent EU organization to finance high-risk, high-potential R&D projects must be created

- Targeted subsidies as well as standards, bans and incentives are warranted when carbon pricing reaches its limits. But these are complex and prone to capture. Another independent body should inform citizens and decision-makers of the cost of various climate actions.

- France can set an example and put pressure on other countries, promoting innovations that benefit poor countries, and developing effective international agreements

Inequality

- School integration and increased spending on disadvantaged students must go hand in hand, improving access to education and employment

- More autonomy, accountability, and training should be given to schools and teachers to develop innovative approaches

- Teacher salaries, at least for new recruits, should be higher and reflect skills. Bonuses should encourage experienced teachers to work in disadvantaged areas

- Better design of inheritance tax, reducing loopholes, with revenues explicitly earmarked for equal opportunity redistribution

- Implement fairer taxation using AI, information exchange, and international agreements

- International best practices in continuing education include rigorous certification, with job training design based on interactions with private-sector employers

- Stimulate the creation of high-quality jobs, improve the internal organization of firms, influence technological progress, and redefine regulation to avoid social dumping

Demographics

- Workers accumulate points until they apply for their pension. Each point would give the right to the same amount

- People with low salaries or a difficult career path should receive "free points"

- Working beyond the retirement age should earn points for both additional years worked and the reduced number of years receiving a pension

- People in strenuous jobs should be able to retire early, with their employers bearing the cost

- The value of a pension point should be calculated to balance the system, and indexed to wage growth instead of price inflation

- A rule that maintains a 2:1 ratio of work to retirement years would keep the system broadly in balance

- A new independent board should make decisions reflecting society's preferences, and a new reserve fund should protect against shocks

- Seniors should be encouraged to work longer by improving further education, working conditions, and the prevention and treatment of chronic diseases.

-Firms should be incentivized to keep their older workers longer, if they so desire.

- Immigrants, especially women, must be better integrated into the labor market

Full report: