Jean-Paul Fitoussi
Photo: EPA
'Cutting taxes may just lead to bankruptcy'
Ahead of Trajtenberg Committees findings, prominent French economist Prof. Jean-Paul Fitoussi invokes his rich experience to castigate committee's mandate. 'Without freedom of action, it's sure to fail,' he says
It's the beginning of 2008, a moment before a financial crisis descends on the world, and French economist Jean-Paul Fitoussi finds himself at the helm of the French version of the Trajtenberg Committee alongside Nobel Prize laureate Joseph Stiglitz.


The committee, appointed by the president himself, was tasked with examining whether the GDP is a reliable index of the quality of life or whether another kind of index is necessary.


It is no coincidence that Fitoussi was named for the job that required not only vast economic knowledge but also social sensitivity and foresight. For years Fitoussi has been conducting research on topics such as the relationship between growth and inequality and social welfare.


Therefore, when Fitoussi deems it appropriate to criticize the Trajtenberg Committee, its best to listen up.


Fitoussi claims that the iron rule governing the committee's task – staying within the budgetary limits – is its worst hindrance.


"The most important question that should be the point of departure is: 'If there is restricted freedom of movement, why appoint a committee to begin with?' It's not the committee's fault – without leeway it can't work magic. I do, however, think that its work can be a beginning.


"In time, the government will come to realize that the committee needs more leeway if they want to meet the legitimate demands of the people," says Fitoussi in an exclusive interview to Calcalist.


The prime minister and finance minister are justifying their policy by claiming that the growth is high and unemployment is low, and refuse to open up the budget to avoid "finding ourselves in the same situation as Greece."


"What they're talking about has nothing to do with Europe's case, because the issues in Europe are political: The European Union was forged without solidarity, the members of the EU do not march to the same beat on nearly every issue. Europe also has a lower public debt then the US; its fiscal deficit is lower than the US.


"Why is the interest rate on US government bonds lower than in Europe? There is no reason for this other than the fact that the in terms of its fiscal policy, Europe is a confederation.


"Greece, Italy and Spain are separate states but they have no monetary sovereignty or control over their currency exchange rates. Were they to have such sovereignty, they wouldn't have a problem.


"European states do not hold economic policy instruments like other normal states exactly because they are part of a union. Their currency cannot be reevaluated, for example. One can compare Israel to Britain which has its own currency, but not to Spain."


'Net worth became overestimated'

This summer, when Israel's social protest was at its peak, Fitoussi was among its supporters.


"The protest movement in Israel is a very accurate expression of the deep distaste that emanated from the deterioration of Democracy. We, the economists of the world, support this protest", Fitoussi and other economists wrote in letter of opinion published two months ago.


Until last year, Fitoussi was the president of the French Institution of Research (OFCE) and since 1977 he's been serving on the Presidential committee for the economic analysis as well as on the national economic committee.


Fitoussi's support of the protest is indicative of his economic weltanschauung, which views government intervention in the economy as the only means with which to preserve ongoing economic growth and stability.


As part of his research, Fitoussi often dealt with theories of inflation, unemployment, open economy and the role of macro-economic policies. More than once, Fitoussi criticized strict fiscal and monetary policies, claiming that they have an adverse effect on growth and employment.


Like so many other voices in Israel's current social protest, Fitoussi pins the world's economic troubles on the social inequality.


"Net worth has become overestimates beyond any reasonable scale, and high asset prices create a mistaken impression that high levels of debt are a sin qua non," wrote Fitoussi in a study published in 2010. The study criticized the capitalistic system and argued that the sub-prime crisis – usually regarded as the culprit of the 2008 crisis – was merely a catalyst.


The roots of the crisis lie in growing social inequality – a process that has been evolving for the past three decades and weighing down economic growth. Fitoussi claims that despite the disparity between the points of departure and policies in Europe and the US institutions, at the end of the day, they lead to the same outcome because of growing social inequality.


"There's a huge difference between US policies and their European counterparts. Europe adheres to a passive economic policy whereas the US has an active economic policy," says Fitoussi. "Europe has a slow growth rate, high unemployment rates and a weak macro-economic policy which has deepened the social gap in the past three decades.


"In the US we started off at a high level of inequality but by maintaining the inequality in the economy despite high unemployment by means of active macroeconomics, the government was able to hide the system's inequality."


Fitoussi is one of Europe's most prominent economists. He is a Professor of Economics at the Paris Institute of Political Studies (Sciences Po); in 2008-2009 he served as an expert on the European Parliaments committee for economic and monetary affairs and was a member of the UN's committee on the reforms in the global financial and monetary system.


Despite his criticism against Israel's government policies, Fitoussi admits that Israel faces particularly difficult challenges as compared with other countries.


"Israeli politicians are faced with the most difficult task among all of the countries I know, because the county has to invest in economic security as well as in its defense. The same way Israel cannot be measured against Spain because of different monetary systems, Spain cannot be compared to Israel because it is not fighting for its survival."


What will be Israel's main challenge in the upcoming decades?


"Both the economic security and the defense. Both have vast economic implications."


What is the solution for this?


"Growth is one answer but peace would be the best solution."


And without peace?


"Growth. You have economic growth but it is not distributed equally to all of parts of society. You have average growth but not median growth, which is the growth that affects most of the population."


Fitoussi has been acquainted with Israel's central bank's Commissioner Stanley Fischer for 40 years, since college, This might be the reason that he elegantly avoids criticizing the Bank of Israel's policies regarding cutting interest rates and housing. "He's rather liberal," he finally agreed to comment on his friend.


'Lowering taxes a formula for inequality'

As aforementioned, inequality is one the mainstays of Fitoussi's research.


"Increasing inequality is a structural element that leads to low aggregated demand", he explains. "What can be done in the present to avoid this kind of effect? Firstly, deal with the level of inequality, which climbed since the crisis because of the fiscal competition between the countries. Europe, for example, opted to drop tax brackets to attract more capital and more workers with higher skill levels.


"The United States tax cutting policies such as the Bush administration performed, leads to lower levels of redistribution and to increasing inequality. Add the de-localization in which unskilled labor is in fierce competition with Chinese and Indian labor – this is a surefire recipe for increasing inequality."


Are we on the brink of a new economic crisis?


"We might find ourselves in a crisis, but I have no crystal ball and I'm no prophet. I can't tell you whether this will happen in the next two years or the next seven years, but today we know that macroeconomics has lost most of its maneuvering room because of public debt issues.


"If we continue along these lines of growing inequality and restricted macroeconomics we might find ourselves in another deep economic crisis."


In his recent study, Fitoussi compares the climb in the average income to the rise in the average wages of the three lower quintile social strata in the lower, middle and high of the OECD countries. France was the only country in which the index was positive in the middle and low quintile and negative in the high quintile.


"France is unusual", says Fitoussi. "Its social welfare system is stronger. If you have a high rate of economical growth but only 10% of the population enjoys it – than it's no big achievement. You'd rather have low economic growth that benefits 80% of society."


Fitoussi's research addresses issues related to tax cuts in general and cuts in corporate taxes in particular – a hot topic in Israel these days in which corporate tax is to be cut from 25% to 18% over the next six years.


"Israel's inequality is very high and has considerably grown in recent years", says Fitoussi. "One of the reasons is a decline in progressive taxation – if you cut taxes for the rich, than you can't provide the population with proper public services."


But on the other hand, raising taxes will drive the rich to seek other places?


"This is exactly the bone of contention of fiscal competition: in the end, no one will pay taxes because we'll be afraid to drive them away and then there'll be no state and no public services.


"It's a question of levels – is there enough for egalitarian funding of a strong social system such as a modern state should offer its citizens? If the only way to prevent people from leaving is to cut taxes, bankruptcy will arrive sooner or later."


But that's the approach of Israel's prime minister.


"Yes but he's not alone. The Republicans in the US subscribe to the same school of thought. It's a debate that is everywhere. The problem is that it’s a game in which everyone loses because in time, lower taxation makes courtiers poorer."


But the alternative requires increasing the debt-to-product ratio


"Sometimes you have your back against the wall – you either leave the population to die or you increase public debt. Time is not on our side: It's better to increase the debt today so it can drop tomorrow.


"If by cutting the debt today we lower the economy's growth potential, that means that we increase the debt tomorrow. It's a tradeoff between now and later. The issue here is not whether we chose between having a deficit or not, I prefer not to have a deficit, but I prefer having a deficit today than dying tomorrow."


Click here to read this report in Hebrew



First published: 09.26.11, 07:49
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