Philippe Aghion is a senior economics advisor to François Hollande, the Socialist Party candidate for the French presidential elections due next spring, and is notably concerned with defining an alternative strategy to tackle the economic crisis.
An economics professor at Harvard University and a visiting professor at the Paris School of Economics (l'Ecole d'économie de Paris), Aghion is strongly influenced by the work of Austro-American economist Joseph Schumpeter (1883-1950), Aghion specialises in innovation policy.
He was previously a member of the Attali Economic Growth Committee ("Committee for the Liberation of Growth" set up in 2007 by President Nicolas Sarkozy and chaired by political advisor Jacques Attali) and the author of a controversial 2010 report on "academic excellence", in which he defended university reforms initiated in 2007 by then-higher education minister Valérie Pécresse.
In a brief essay co-authored by Alexandra Roulet, entitled Repenser l'Etat [1] (‘Rethinking the State'), Aghion, 55, makes the case for rebuilding a social democracy sorely discredited by the current crisis. Aghion expounds the benefits of a ‘strategic state': a middle road, not unlike Tony Blair's ‘Third Way', that has yet to be built between (Obama-style) Keynesian economics, which is now running out of steam, and brutal (David Cameron-style) neo-liberal recipes.
The views he details in this interview with Mediapart's Ludovic Lamant, are likely to be the lynchpin of François Hollande's economic policies and, if Hollande is elected in May, those of the next French government.
-------------------------
Mediapart: In the 1990s, Anthony Giddens theorized a ‘Third Way' for Tony Blair's economic strategy. The object then was to "renew social democracy", which is what you are urging now. What's the difference between your approach and the Third Way?
Philippe Aghion: The theorists of the ‘Third Way' sought to reconcile greater equality of opportunity, and curbing inequalities, with the globalised economy. But their approach gave rise to keen disappointments. It encouraged deregulation and put business in the driver's seat. It did not carry out any serious tax reforms. It followed Thatcherism in its distrust of unions and social democracy. And it got lamentably mixed up with the Bush administration in the Iraq venture.
Mediapart: But there is all the same common ground between your approach and theirs.
P.A.: We agree on the idea that the state should help people cope with the new risks by helping them get back on their feet, rather than by developing a culture of government handouts. But unlike New Labour, which relied entirely on market forces, we advocate a strategic state that will restore the credibility of industrial policy.
We're also for a state that invests in social democracy, that is to say in dialogue between management and labour in every company. Whereas Blair confined himself to denouncing pre-Thatcher corporatist practices. We are calling for a thoroughgoing tax reform, whereas New Labour only reformed the tax system along the edges. Lastly, the deepening of democracy and the impartiality of the state are fundamental to us. They will ensure that the state's target investments conform to strict criteria, growth, jobs, instead of benefitting corporations which are friends with those in power.
-------------------------
1: Repenser l'Etat was published in France in September by Les Éditions du Seuil, priced 11.5 euros.
Somewhere between Keynes and ‘less government’
Mediapart: Some see the current crisis as the upshot of the conceptions of European social democracy that accompanied and even accelerated the spread of financial capitalism, the very brand of capitalism that has led us straight to disaster. So what's the point of rethinking social democracy? Shouldn't we be changing the software instead?
P.A.: Several left-of-centre governments in Europe that pledged allegiance to social democracy found themselves without a strategy. As the old model of the welfare state wasn't working anymore, they rushed headlong into deregulation left, right and centre. Their role, in this context, consisted simply in containing the damage. And providing guarantees of civil liberties.
They defended competition, not without reason, since that stimulates innovation, but gave up on industrial policy. They fell into line with the Germans' macroeconomic orthodoxy. And above all they proved incapable of putting forward an economic and social agenda that would diverge from both the Keynesian paradigm and the ‘less-government' policy endorsed by neoliberals.
Mediapart: This system is on the rocks. It suffices to look at Spanish Prime Minister José Luis Rodriguez Zapatero, who used to be one of the heroes of European social democracy, and where he is now.
P.A.: The Spanish social democrats didn't make the right choices regarding industrial and labour policy. They left the specialisation of production entirely up to the market. So all the investment went into the building sector, which fuelled the real estate bubble, and they are now suffering the consequences. And they let unemployment grow to excessive proportions without proposing any active policies, such as subsidies for part-time jobs, ‘flexicurity' and the like, which is what was done in Germany and the Scandinavian countries with the successful results we know.
Mediapart: What do you say to those who suggest making the most of the crisis to put an end to the frenzied pursuit of growth at all costs. Or, at the very least, the discarding of gross domestic product as the yardstick of well-being?
P.A.: Growth must not become synonymous with soaring inequalities, with an environment deteriorating out of control, and with mounting job insecurity. Which is why it's important to provide against the new risks, thanks to ‘flexicurity' [Editor's note: portmanteau of labour market flexibility and security for workers], to curb inequalities through a fair tax system, and to have an active industrial policy.
But we are not giving up on innovation and sustainable growth. On the contrary, we are going to stimulate them. Unlike the world view that drives ‘degrowthers', ours is not Malthusian. They believe in a ‘finite' world. We believe on the contrary that innovation can, if well managed by an intelligent state, push the bounds of possibility ever further and increase our life expectancy and quality of life.
'Eurozone needs a fiscal watchdog'
Mediapart: The eurozone is in a crisis. What are your answers?
P.A.: In the short term, we need to recapitalise the banks, particularly so they can withstand the shock when the Greek debt gets discounted below par, which is now inevitable. In the medium term, we need to lay the institutional foundations to introduce Euro bonds and mutualise sovereign debts. Specifically, I mean setting up a eurozone fiscal authority with oversight over national budget developments. In the long term, I think it will be necessary to allocate European structural funds to implementing a Marshall Plan in order to boost innovation and growth in the Southern European countries.
Mediapart: So you prone, therefore, a leap towards federalism?
P.A.: Yes. The left in Germany and Northern Europe seem ready to debate the matter. We need to discuss it now and see what kind of headway towards more federalism is conceivable. To my thinking, this fiscal watchdog would check national budgets and determine which ones satisfy the conditions for a return to a balanced budget.
National governments would retain full sovereignty to decide in detail how to make ends meet, where to cut spending or increase taxes. In return for this right of European oversight, we'd issue European debt - Euro bonds. I would point out that, taken as a whole, Europe is less indebted than the United States or Japan.
Mediapart: And the idea of a ‘European economic government' championed by Nicolas Sarkozy?
P.A.: I have no opinion on the matter. It seems it would be useful above all to have a European finance minister, charged in particular with regulating the whole eurozone banking system.
Mediapart: How should we go about recapitalising banks exposed to sovereign debts?
P.A.: French banks are under-capitalised. On that point I concur with the analyses of Thomas Philippon [economics professor at New York University - see interview with Philippon in French here]. He suggests the state take preferred stock, without voting rights within the banks, but with options ensuring dividends are paid when the banks make money.
Mediapart: Are you for or against the financial transaction tax?
P.A.: It's a very good idea. There is now a broad consensus on the matter.
'Rein in cronyism, encourage innovation'
Mediapart: In your book you advocate investing in healthcare, education and industry. But how much room for manoeuvre will a future government have? One sometimes has the impression you are overlooking the European debt crisis.
P.A.: To make room for fiscal manoeuvre and to reconcile a balanced budget with growth, three things need to be done. First off, I don't spend all over the place because I can't do everything. I spend selectively. Secondly, in my spending I modify the governance of the sectors I'm investing in to gain in efficacy. For example, the idea is not just to give money to schools, but also to rethink how schools ought to be reorganised.
Even if we do need to keep school curricula and teacher training centralised, we can give schools more autonomy, especially in the domain of personnel management. My third point is tax reform. We're going to have to increase certain taxes, and tackle tax havens right away.
Mediapart: The risk of global recession is back. Does that reflect the failure of Keynesian reflationary measures?
P.A.: In the old days, to get out of a recession one had only to boost demand by indiscriminately increasing public spending. That view is now outmoded. We've come to realise that the famous ‘Keynesian multiplier' [that a little government spending greatly increases employment and prosperity] was less significant than expected. Naturally, I'm not throwing Keynes out the window. Automatic stabilisers [economic policies/programmes that offset economic trends without government action, e.g. unemployment benefits] are a good answer to the crisis, and have enabled France to absorb the shock during the crisis.
But we do see that the Keynesian answer is no longer suited to today's world. Because we're in an open economy, measures to boost demand in one country end up benefiting other countries, too. Remember the 1981 reflationary efforts in France, which benefitted Germany. Besides, nowadays we can no longer afford to keep growing the deficit.
Mediapart: So what do you propose?
P.A.: Between those who propose Keynesian pump-priming measures and neoliberals like David Cameron or American Republicans who propose cutting spending and taxes, I advocate strategic government. A government that acts primarily on the supply side and makes selective spending choices. A government that strives to support corporate research and development and training activities for the duration of the economic cycle.
Mediapart: You also contend that corruption, and the ‘capitalism of cronyism' that is rampant in France, are a drag on a nation's growth. Why is that?
P.A.: The sort of innovation-driven social democracy that I ardently desire rests on two pillars, one being the tax system and the other democracy. Democracy is not a luxury. The most corrupt countries also happen to be the ones with the least growth. If the big entrenched companies have relations of cronyism with the government, that keeps new companies out of the market that are more likely to innovate.
To curb corruption, the first thing needful is independent media. In France, most of the major media belong to conglomerates that benefit from government contracts. So the state has a huge hold on them, since it can threaten not to renew their government contracts.
We also need a judicial system that is more independent from the executive branch. In northern European countries, it would be unthinkable for a justice minister to be entirely at liberty to appoint his chief-of-staff as a public prosecutor. But [we also need] policy evaluation committees fitted out with real teeth. All those things will make it possible to rein in cronyism and, in so doing, encourage innovation.
-------------------------
English version: Eric Rosencrantz
(Editing by Graham Tearse)