Chronic. The next President of the Republic, whoever he is, risks being confronted with an economic situation very close to that of the years 1970-2008, an “economy of yesteryear” very far from that which we have known in recent years. – between 2010 and the Covid-19 crisis.
In that old economy, there was inflation. It was then due to the acceleration of wages, when economies approached full employment, and to the indexation of wages to prices. Indeed, the bargaining power of 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 to employees, and finally that wages were protected against inflation by 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 led above all to a decline in profits, since indexation wages spared employees the consequences of these shocks.
Finally, in this environment marked by inflation and the struggle between employees and companies for income sharing, central banks, especially from 1980, had as their primary objective to fight against inflation. Each 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 over the long term: it was counter-cyclical, but 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 periods of expansion.
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 presence, and with the deregulation of labor markets (reduction of job protection, facilitation of dismissals). The result is a distortion of income sharing to the detriment of employees in all OECD countries, except in France and Italy. Lower wage increases lead to lower inflation. But the cost of inflationary shocks (rise in energy, food, transport prices, etc.) is, as currently, borne by employees more than by companies, because, from the beginning of the 2000s, salaries are weakly indexed to prices. Finally, full employment no longer leads to inflation – as we clearly saw in 2018-2019, the fall in unemployment no longer (or less) leading to wage increases.
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