The original article from Pal Fabra is available here: Capitalisme avec capital = emplois | Les Echos
Paul Fabra - Published on July 2, 1993, at 01:01
To reverse the dramatic trend of deteriorating employment, the government has already announced numerous measures. Others will follow. Employers say they are ready to lend a hand. A promise has been made to significantly increase the number of young people in apprenticeships. There is every reason to expect important and—need it be specified?—eminently desirable results from this. However, better vocational training will only facilitate hiring on the condition that jobs are created. And that is an entirely different matter.
Providing the means to work for job seekers is the task of capitalism (see last Friday's column). Yet, the two sources of financing available to companies— equity on one side and borrowed funds on the other—form a total insufficient to ensure full employment. Their distribution is also inadequate. The share of the former is still not large enough relative to the latter. The growing wave of bankruptcies attests to this imbalance.
Among the causes behind the deficiency of capital, both in absolute and relative terms, the ‘phynancial pump’, as Father Ubu169 would say, organized by the State, features prominently. Contrary to what finance ministers tirelessly repeat at each of their meetings (EC Council, G7, OECD, Monetary Fund, etc.), it is not savings that are lacking. On the contrary, savings are abundant and available. The influx of subscriptions to the major loan currently launched by the French state is further proof. But public savings are diverted from their purpose. Instead of naturally flowing into economically productive uses, the market, placed almost exclusively at the service of the State—through mutual funds (SICAVs) or otherwise—spares it the trouble of making difficult choices. The Treasury offers a rich palette of issues with attractive interest rates, towards which savings need only rush.
This is reason enough not to judge the success of the current operation solely on the criterion of the "confidence" it reveals. Success would only be complete on one condition at least. This new and massive levy is presented as an advance on privatizations; the government should consequently allocate a portion of its expected proceeds now to repay previously contracted loans obtained under more onerous conditions for the budget! This is a theme that Edouard Balladur has often, and judiciously, expressed (and implemented in 1986-1987): the most rational use that can be made of the sale of state industrial assets is public debt reduction. Listening to some government ministers and experts, the time for such orthodox scruples seems to have passed. Why? Because of the extreme severity of the crisis. Their belated discovery of it (simultaneously with the Forecasting Directorate!) pushes them to recommend spending all this money as quickly as possible. To this knee-jerk reaction, we respond thusly: the best prelude to the difficult but indispensable recapitalization of the private economy would be a start to cleaning up the public finances.
Another factor has played a role in quietly draining the economy's funding sources. The forced-march boom of 1988 to 1990 resulted in a tremendous waste of capital. One need only consider the enormous resources squandered in real estate speculation and the construction of offices that remained empty! A further reason for the State to resist the temptation to launch public works programs, whose sole effect would be to provide momentary support. The imperative imposed by the brutal decline in activity is to patiently initiate a recovery process. Anything that even remotely resembles the opening of national workshops must be ruthlessly proscribed.
Loudly and clearly, employers' representatives argue that it is futile to expect a recovery without a boost in demand. Some of them are just short of demanding that the Balladur government draw inspiration, in its own way but draw inspiration nonetheless, from the policy implemented by the triumphant and blind left in the spring of 1981. Michel Giraud, the Minister of Labor, undoubtedly believes he is in step with the times by endorsing the simplistic idea of "sharing and reducing working hours." The Germans have, in recent years, taken the lead on this path. Timidly, they are now trying to reverse course.
To help industry, Chancellor Kohl and his finance minister are calling on unions to renounce the thirty-five-hour week. This seems a better defense against "relocations" than imposing new constraints on companies in the form of shortened hours. We return to the fundamental question: what is the point, while consumption is faltering, of seeking a way out of the crisis through action aimed not at stimulating demand, but at improving the production tool—technically, humanly, and, last but not least, financially, through recapitalization?
One of my Parisian correspondents, Dominique Michaut, a management specialist, writes:
An increase in the quantities demanded is not necessary to justify existing companies, and those being created, increasing their capital without reducing their debt in absolute terms. It is sufficient that an increase in the qualities offered, and a diversification of their varieties, be an element of competitiveness. There can be economic growth without an increase in the quantities produced. It is the value of production that counts." And he adds: "Offer managers a significantly increased ability to mobilize capital, and you will see that they will take advantage of it even if the economy is in a deep depression.
By what means can this mobilization be increased?
Schematically, it would be appropriate to reorient the financial reforms of the last ten years—carried out under the guise of deregulation to serve the interests of the State and large companies, not forgetting those of high-flying raiders—in an economic direction. The Civil Code prohibits public calls for investment, except by express legal derogation. The reform consisted of generalizing this call. So be it. But both law and economics would gain greatly if measures were taken so that this extension resumes the principal form it had traditionally taken in liberal civilizations. The generalized public call for investment was modeled on the Treasury's calls to the public. Large companies were given the possibility to substitute bank credit with issues of commercial paper (the private sector equivalent of Treasury bills), while banks, instead of taking deposits, embarked on a large scale on an active management, so to speak, of their liabilities by issuing certificates of deposit on the market. Simultaneously, the long-term bond market was entirely monopolized by the State to finance its deficit.
The fall in short-term rates should allow for a reorientation of Treasury borrowing towards closer maturities: nothing is more aberrant than 10 and 15-year issues, or even 25 and 30-year ones, to finance current public expenditures! Simultaneously, it would be appropriate to revive the private bond market, which has practically disappeared. Above all, corporate public calls for investment should once again be made primarily on the stock market. A start in this direction, which was thought to be promising, took place between 1985 and the stock market crash (due to the abuse of credit on an international scale) of October 1987. It was cut short. An indebted company quickly comes to subordinate all its decisions to covering its financial charges. The reduction of other recurring costs becomes an obsession. Layoffs go hand in hand with the de facto disappearance of long-term prospects.
Today, attention is exclusively focused on lowering interest rates. This is only a prerequisite, indispensable, but in itself very insufficient to healthily restart activity. The most important variable in a capitalist economy geared towards creating sustainable jobs is what is conventionally called "financial rate of return" (the adjective is probably superfluous), meaning the remuneration obtained by shareholders on their investment. Dominique Michaut writes on this subject: "Instead of saying that the issue price of a share represents, for example, thirteen times the estimated earnings per share for 1993, it would be preferable to say that this estimated profit is equal to 7.7% of the issue price. Better still: the percentage that should be systematically published is that of distributed profits, avoir fiscal (tax credit) included, relative to the share value." Such a reversal of perspective presupposes a complete change of climate. Financial deregulation, as practiced, has surreptitiously confirmed debt as the norm. This is something we will have the opportunity to verify shortly.