Friday, June 13, 2008

France To Subsidize Gasoline (Government Intervention Run Amuck No. 18)

Just when you thought French President Sarkozy's government was getting things right, you learn something like this:

Francois Fillon, the Prime Minister, announced last night that the government will help all wage earners meet the rising cost of gasoline through a direct paycheck subsidy.

[Thanks to for the photo.]

To quote an article published at the French TF1 TV website:

"Francois Fillon announced a 'direct subsidy' for all wage earners to help them meet the rising cost of their commute to work, and he asked that all the social partners [the powerful French unions] come to agreement on the conditions surrounding this transfer." ... "The Prime Minister chose the method of a direct payment that would appear on the paystub of salaried workers." ... "The conditions to receive the subsidy should include the impossibility of using some form of public transport."

(At the same time, he announced the development of plans for new nuclear facilities, a more practical solution. France is way ahead of the U.S. in this domain.)

Recently, France and other European countries have suffered a number of trucking stoppages and public unrest due to the high cost of gas.

Remember that the social system of many European countries needs to be fed regularly, and a good bite comes out of the French gas budget in the form of taxes; so right now a French worker pays almost $10 a gallon, and large transport companies are suffering even more there than here.

Subsidizing gasoline for commuters is:

(1) Robbing Peter to pay Paul (i.e. taking tax money from the truckers and from all consumers and giving it back to some consumers);

(2) Encouraging consumers to buy more gasoline thereby upholding the demand level even at these unprecented prices;

(3) Placing an additional burden on the already heavily indebted French social economy; and

(4) Using counterproductive measures from an economic standpoint, because when high prices don't result in a lessening of demand, the high prices continue (even if the measure is "productive" in the sense that it calms voters' ire).

On a more positive note, hopefully all those gallon-dollars and euros will end up encouraging production and expansion of the energy industries, provided that they don't think this price spiking is an effect of speculation alone (and there is debate about this on all sides).

So you have here a double-whammy of messy government intervention:

- Bubbles in commodity prices probably are caused at least in part by interventionary and loose central bank monetary policy; and

- These efforts to calm the masses through hand-outs that strain public budgets will only be palliative and most likely will backfire.

Good grief. What a mess.

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