“The return to the economy of yesteryear can be violent”

Chronic. The next President of the Republic, whoever he may be, runs the risk of facing an economic situation very close to that of the years 1970-2008, an “economy of yesteryear” far removed from what we have known in recent years.- between 2010 and the Covid-19 crisis.

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In that old economy, there was inflation. It was then due to the acceleration of wages, when the economies were approaching full employment, and the indexation of wages to prices. In fact, the bargaining power of the employees was high; this implied, on the one hand, that employees could benefit from periods of full employment to obtain faster wage increases, on the other hand, that productivity gains were redistributed among employees, and, finally, that wages were hedged against inflation indexing them to prices.

The second characteristic of the economy of the past was that inflationary shocks (rise in the prices of raw materials and energy, social conflicts) were essentially borne by companies and caused, above all, a fall in profits, since the indexation of wages avoided workers the consequences of these shocks.

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Finally, in this environment marked by inflation and the struggle between workers and companies for the distribution of income, the central banks, especially from 1980, had as their main objective to fight against inflation. Every time inflation increased (1973-1974, 1980-1982, 1998-2000, and even 2006-2008), interest rates rose sharply; long-term interest rates were on average higher than the growth rates of the economy.

expansionist policies

As a result, fiscal policy could not remain expansionary in the long run: it was countercyclical, but it had to stabilize the public debt ratio on average. States had to ensure the sustainability of public debts by returning to restrictive budgetary policies in the second half of expansion periods.

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Everything changed from the subprime crisis of 2008-2009, but certain developments appeared from the beginning of the 2000s. The starting point was the loss of bargaining power of employees, with deindustrialization and job creation. in many small service companies, where there is little union. social presence, and with the deregulation of labor markets (reduction of labor protection, facilitation of dismissals). The result is a distortion of income distribution to the detriment of employees in all OECD countries except France and Italy. Lower wage increases lead to lower inflation. But the cost of inflationary shocks (increases in the prices of energy, food, transport, etc.) is, as it is today, more borne by employees than by companies, because, since the early 2000s, wages are weakly indexed to prices. Finally, full employment no longer leads to inflation; As we clearly saw in 2018-2019, falling unemployment no longer (or less) leads to wage increases.

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