Economic Austerity, French Style!

Here we go again! The federal government of the United States, having repeatedly failed to meet its own self-imposed deadlines to balance its budget, is quickly approaching yet another deadline.

The names of the deadlines are becoming more exciting, though, aren’t they? First we experienced the tamely termed debt ceiling. Then we approached the more aggressively named fiscal cliff. And now we are encountered the inscrutable yet terrifying sequestration.

Meanwhile, on the other side of the Atlantic Ocean, French citizens are collectively engaged in their own unpleasant experiences with economic austerity. The nature of their experiences, in contrast to America’s, reveals quite a bit about the cultural differences between the two societies.

The So-Called Workers

The most recent controversy involved the blunt comments of an American business executive about a French tire factory. Titan International’s CEO Morry Taylor visited France in contemplation of an acquisition of the plant, but told the French Minister of Industry Arnaud Montebourg:

“The French work force gets paid high wages but works only three hours. They get one hour for breaks and lunch, talk for three and work for three.” He continued: “Titan is going to buy a Chinese tire company or an Indian one, pay less than one Euro per hour wage and ship all the tires France needs. You can keep the so-called workers.”

Sacre Bleu! What outrageous insults! But the comments weren’t much harsher than the complaints that French citizens launched at their own President Francois Hollande after he attempted to modify the calendar of the public school system.

Hump Day Traditions

In the United States, the middle day of the working week (i.e Wednesday) is colloquially called Hump Day. That’s because we all require a fair amount of physical and mental stamina to make it “over the hump” and slide into the second half of the week.

But American society has never formalized any special traditions for Hump Day. Indeed, Wednesday has remained a standard work day, along with Monday, Tuesday, Thursday, and Friday. In France, however, Wednesday has been treated as a special day by the public school system.

How special? Well, most state schools are closed on that day. Indeed, each Wednesday is treated as a weekend day, albeit one that falls in the middle of the week.

And how have the citizens of France responded to President Hollande’s recent suggestion that children should attend schools on Wednesday mornings? One critic complained “This is the only country I know where the adults work 35 hours a week, but they expect their kids to work more.”

Sequestration

While the French have been debating issues like three hour work days and four day school weeks, the American people have begun to learn about an entirely different level of economic austerity.

What is it? Why, it’s sequestration! That’s a legal term that was originally coined to describe the seizure of property under dispute for safekeeping to prevent a party from obtaining or damaging it. But ever since the Gramm-Rudman-Hollings Deficit Reduction Act was signed into law in 1985, the term has come to mean something entirely different.

In essence, on certain arbitrary dates defined by law, the United States Treasury is required to sequester (i.e. not spend) any funds that would be borrowed under normal operating practices. This nullification of spending activities, in turn, eliminates any reason for the federal government to borrow more money and extend its deficit; it thus serves as a debt limitation tactic.

What happens to government operations that need those unborrowed and unspent funds in order to conduct their business activities? They are forced to implement devastating cutbacks, thereby depriving the American people of many necessary services.

Values and Expectations

So how do they do it? How does the French government manage to remain so far ahead of the American government in terms of its ability to help its people maintain a reasonable standard of living with relatively less work effort?

Well, the French government presides over a society that is willing to acquire less wealth for less work. While estimates of America’s Gross Domestic Product per capita range from $46,000 to $48,000, estimates of France’s GDP only range from $35,000 to $36,000.

And then there are taxes. The French people pay their federal government a Value Added Tax, a Wealth Tax, and an income tax with a top marginal rate of 75%. None of these taxes exist at such levels in the United States.

So the cultural differences between the societies are clearly defined. French citizens expect to generate and accumulate less wealth, and they bear the burden of higher taxes. In return, they value and expect a life style of limited work. American citizens, on the other hand, expect more wealth and lower taxes. In return, they value and expect a life style of significant work.

In other words, cultural values shape expectations, and expectations shape nations. The results, perhaps unsurprisingly, are self evident.

The National Debt: $15 Trillion And Climbing

Do you remember the Great National Debt Ceiling Debate of July 2011? The United States government was approaching its self-imposed debt ceiling of $14.3 trillion, and Republicans in Congress were refusing to increase the limit. But Democratic President Barack Obama and his Congressional allies refused to slash government social service programs, and the entire national government lurched painfully towards a full scale default.

At the last moment, the parties compromised by passing a short term spending measure, along with legislation to create a bipartisan “super committee” of Congressional leaders to negotiate a long term solution to the crisis. They gave the committee until this week to reach an agreement on restoring fiscal sanity to the federal budget process.

Meantime, in just the last four months, the pile of debt has soared from $14.3 trillion to well past $15 trillion. And how much progress has the super committee made towards reaching an agreement on balancing the budget and paying down the debt?

Apparently, none whatsoever.

The Threat of Sequestration

The politicians all hit the Sunday morning talk shows this weekend, full of blame for the opposing parties. The Democrats continued to paint their opponents as the party of the wealthy, while the Republicans countered that the Dems would tax and spend the nation into oblivion.

Lurking in the background, though, is a fail-safe trap door called “sequestration.” In order to ensure that the financial markets would not panic at any hint of a super-committee failure, last July’s budget law arranged for discretionary spending to be slashed across the board in an automatic, indiscriminate manner if no agreement was in sight by this week.

That’s exactly where the process appears to be heading, although both parties seem to agree that indiscriminate slashing would harm the national interest. Democratic Defense Secretary Leon Panetta and Republican South Carolina Senator Lindsey Graham, for instance, appear to fully agree that such budget reductions would gut the nation’s military capabilities.

And what if the United States simply decided to continue spending its way into a larger debt burden? We can easily glance across the Atlantic Ocean, to a similar crisis unfolding in Europe, to foresee the consequences of such a choice.

Three Weeks, Three Fallen Governments

As in the United States, the nations of the European Union (EU) are attempting to address their own debt burdens. Although the EU itself is not in danger of default, several of its member nations are now unable to borrow money on the credit markets at reasonably affordable interest rates. Their response has been to resort to deeply unpopular austerity measures to conserve cash flow to pay down debt.

The public response, predictably, has been angry. Two weeks ago, the Greek government was swept out of office by a disgusted public that had been rioting in the streets of Athens. Last week, as protests grew in Rome and other Italian cities, Prime Minister Silvio Berlusconi resigned from office as well. And just last weekend, the conservative Popular Party of Spain swept back into power, dislodging a Socialist Party that had ruled since the early days of the deeply unpopular Iraq War.

Skeptics continue to raise concerns that the entire euro currency may be doomed if the EU fails to establish a process to bail out debt-burdened member nations.  Expecting the EU to do so is somewhat analogous to expecting the federal government of the United States to bail out bankrupt states like California … except that, unlike the EU, America’s federal government itself is drowning in debt.

Things To Come

So what can we expect to occur in the United States in the near future? It is indeed highly doubtful that the political parties will suddenly be seized by a spirit of compromise and achieve a comprehensive agreement on balancing the annual budget and then paying down the $15 trillion of accumulated debt. That is a particularly unlikely scenario, given that the presidential election campaign is about to shift into high gear with the Iowa Caucus and New Hampshire Primary in January 2012.

It is likely, though, that some last-moment stop-gap measure will be arranged before the process of sequestration begins to eviscerate the U.S. Defense budget and other discretionary funding programs. And as long as other regions of the world appear unstable, the global credit markets may continue to demand American debt, thereby bidding down the interest rate that America must pay to borrow funds.

But sooner or later, global investors will inevitably begin to grow nervous about American profligacy, and will finally look to other governments who wish to borrow money. That is when interest rates paid by the United States government may climb to unsustainable levels, and when the American debt bubble may finally burst.

In European nations, national governments tend to fall once their interest rates rise beyond 7%. Although the American government is still borrowing at rates below 1%, it should not assume that those rates will remain low indefinitely.