Éric Pichet

Éric Pichet (born in 1960) is a professor at KEDGE Business School teaching at a post-graduate level and French economist. His main areas of expertise include market finance, monetary economics, fiscal economics, corporate governance and fiscal governance.

Biography

Eric Pichet is a graduate of HEC Paris, ESORSEM (French Staff College) and IMPI (postgraduate programme in Wealth Management and Real Estate of Kedge Business School). He has a Ph.D in Management from the University of the Littoral Opal Coast with a thesis entitled “Convergence between Corporate Governance Practices in the large listed companies”. In 2008, he qualified an HDR Ph.D supervisor at the same university with dissertation entitled “An Hypermodern Analysis of Contemporary Social Governances”.

Pichet began his career at French stockbroker CHOLET DUPONT before moving on to HSBC where he traded options and derivatives before becoming a financial analyst and joining France’s SFAF (French Society of Financial Analysts). He has also worked as an independent financial expert and acted in an independent director’s capacity since 2004. He is a member of the IFA French Directors Institute's research centre and sits on the boards of several investment companies in France, including Twenty First Capital, Gestion 21 and Signaux Girod (also Chairman of the audit Committee). Pichet works with more than a dozen publicly listed international hedge funds outside France and is Chairman of the Board of Directors^[1] at Diapason (Lausanne). Lastly, he belongs to the APM (Association for Progress in Management), where he also works in an expert’s capacity, and is chairman at CORAL, a French think tank of authors, book publishers and editors.

Currently employed as Professor of Economics at KEDGE Business School, since 2000 he has also been Director of KEDGE’s postgraduate IMPI Wealth & Real Estate Institute (IMPI). Pichet is a fellow at the Royal Institution of Chartered Surveyors, an Associate Researcher at the University of Bordeaux IV LAREFI research centre and, since 1990 Professor at the SFAF Training Centre. In 2011, he published a methodological guide for research professors seeking a French HDR Ph.D supervision qualification. The book, entitled “Art of the HDR”, contains advice on writing HDR dissertations and supervising Ph.D candidates.

Theories

Éric Pichet has developed theories in different areas.

Corporate governance theories

Enlightened shareholder theory

Enlightened Shareholder Theory^[2] is an advanced and essentially shareholder-oriented corporate governance theory. The rest of Pichet’s body of work in this area, including his 2006 PhD thesis on the “Convergence between corporate governance practices in large publicly listed companies with diffuse shareholdings”, allows him to define three main categories of governance principles that can be applied in large publicly listed companies. These principles :

• Ensure the transparency of corporate information
• Ensure shareholder control of the company, specifically via balanced boards (mixing independent directors with different competencies) and optimised board procedures.
• Enable the whole of the board to participate in corporate strategising, not just the CEO.

Financial Institution governance theories

After analysing the role that failed governance mechanisms played in the Kerviel affair,^[3] Pichet detects a need for major improvements in the governance of large financial institutions, based on:

• Large banks’ internal control systems reporting to the board instead of to the executive
• Boards being able to hire financial market specialists to develop greater authority in this area
• A systematic development of specialist board committees, notably for strategy and risk control purposes

More generally, having analysed financial institutions that made huge losses in 2007–2010, he identifies 6 symptoms^[4] that are always present under these conditions, which create an explosive cocktail when combined. The symptoms include:

1. Having a power-hungry and authoritarian leader (Richard Fuld at Lehman, Sean FitzPatrick at Anglo Irish Bank) driven by an insatiable need for social recognition and obsessed by the desire to unseat the current leader (Goldman Sachs, in this instance).
2. Failed internal governance systems, always involving the board of directors, who on each occasion turned out to be incompetent in terms of managing their strategic control function, and/or too subservient to the executive.
3. An almost unlimited ability to access cheap short-term funding.
4. Massive investment of short-term borrowings in high yield assets with over-estimated safety and liquidity. Between 2002 and 2006 this was best exemplified by direct or indirect investments in property; mortgage loans backed by property assets (i.e. Northern Rock); or lastly, investments in other assets index-linked to property or property loans, such as CDOs, subprimes, etc.
5. Excessive gearing, frequently 20 or 30 times the equity investment on these operations.
6. Failed external regulation mechanisms, due either to excessive complicity between regulators, governments and large financial institutions (Iceland, Ireland); incompetent regulators (Iceland); or insufficient monitoring (the Bank of England’s “light touch” regulation). Note other dysfunctions, such as the fact that the Fed never tries to burst asset bubbles; a poor distribution of tasks among different regulatory bodies (in the UK, between the FSA, Bank of England and HM Treasury; in the US, the Fed’s failure to monitor investment banks); or outright complicity with the institutions that the regulators were supposed to control (as in Ireland).

When all six conditions are met, financial institutions can experience major losses causing them to collapse (Lehman Brothers). Fundamentally, this is an example of systemic risk. As Pichet teaches students, “The needle that pops the balloon (i.e. subprime loans) is just the trigger for the crisis, not the root cause”.

The best way of avoiding future financial failures is to:

• Ensure that large banks provide transparent information
• Reinforce boards’ authority and ability to control corporate strategy
• Enhance regulatory quality

He also criticises three legislative trends that began after the crisis:

• Too many purely formal regulations (like Dodd Frank),
• The illusion that splitting commercial and investment banking offers a viable solution
• Banning short sales, which has no impact on price changes

Tax theory

Wealth tax utility theory

Although Pichet does not contest the theoretical utility of wealth taxes in modern fiscal systems, his analysis of the economic consequences of the ISF^[5] French Wealth Tax led him to the conclusion that this particular levy yields half as much as it costs in lost revenue. He took clearly position against the "French utopia" of a Global tax on the Superrich.^[6]

Optimal taxation theory

Having authored two biographies about Adam Smith, a strong influence in his writings, Pichet’s idea is that taxation must be based on four principles formulated by Smith in “An Inquiry into the Nature and Causes of the Wealth of Nations“, albeit only after adapting them to the 21st century:

• Fairness: taxes must be paid according to each person’s resources and must integrate the Polluter Pays Principle,
• Judicial Security: prohibition not only of all forms of arbitrariness but also all forms of insecurity for however long the taxpayer needs to manage the incentives associated with the initial measure,
• Savings principle. Taxes must be as low as possible to avoid harming economic development. This explains why in 2011 Pichet advocated doing anything possible to reduce the deficit. He disagreed, however, with the proposal that France’s Fillon government put forward in its September 2011 second Budget reading to raise taxes by €11 billion and cut spending by €1 billion. Rather than this to sustain the country’s growth dynamic, he suggested parity between tax rises and spending cuts.
• Convenience principle. Tax payments need to be made easy for taxpayers. This is congruent with the principle of intelligible taxation that France’s Constitutional Council^[7] enacted around the turn of the century.

Tax expenditure theory

In a study published in La Revue de droit fiscal on 5 April 2012,^[8] Pichet presents a theory of tax expenditures (i.e. loopholes) based on three key concepts:

• Benchmark Tax System : Considered more suitable than standard tax systems. This is because the diverse nature of social realities, reflecting developed countries’ singular trajectories, means it is illusory to try and define an absolute tax standard applying everywhere at all times.
• Tax determination modalities (often confused with expenditures). Here Pichet’s idea is that fiscal advantages (like family allowances) awarded to dependent or disabled persons do not constitute tax loopholes but are ways of determining tax owed in France’s benchmark tax systems.
• Legitimate tax expenditures. Pichet also differentiates between legitimate and illegitimate tax expenditures (ones that have no incentive effect, are too costly or unfair, etc.).

This defines tax expenditures as "any legislative, regulatory or administrative provision whose implementation means that the local authorities will lose revenue – with one category of taxpayers paying less in tax that they would have done had the standards associated with the benchmark tax system’s general legal principles been applied". In addition, he proposes a methodology for assessing tax loopholes according to their level of usefulness.

Optimal income and wealth tax theory; the notion of fiscal exile

In a research paper published in the French Review La Revue de droit fiscal on November 15Th 2012,^[9] and in line with Arthur Laffer, Pichet explains that there is an optimal threshold above which tax yields decrease and become both marginally and globally negative due to the diminishing attractiveness of the country implementing the tax and international competition. He demonstrate that to reduce the public deficit, spending cuts are better than tax rises in a country like France, whose 2013 budget deficit was always likely to exceed the 3% level forecast in the annual budget (ultimately the figure was more than 4%). Pichet has invented the expression "Fiscalité au Bollinger"^[10] or “Champagne Taxation” to illustrate this theory.

He goes on with this theory in a study published in La revue de droit fiscal:^[11] “ Everything is happening as if the tax rises had resulted in precautionary behaviour, a slowdown in consumption and a phenomenon of substituting consumption for basic necessities with lower VAT rates. Given the stuttering business activity, reduced overtime, the deteriorating and anxiety-filled environment, the assumption that we had identified in a study published in the Revue de Droit Fiscal in November 2012 seems to be borne out by tax revenue in 2013. In these circumstances, taxes on households, just like the 0.15% rise in employee pension contributions from 1 January 2014, or the rise in VAT to 20% will only hamper consumption and reduce public revenue a little more.”
Despite a relative control over expenditure in 2013, the persistence of a very high public deficit (4.3%) was mainly due to an unprecedented and unexpected drop in tax revenue which confirms the existence of a tax tolerance threshold, specific to each country, and which may have been reached in France. Above this threshold, any tax increase has a counterproductive effect as compulsory taxes stifle activity by further weakening the economy’s growth potential.

Theory of central banking

Drawing lessons from the 2007-2008 financial crisis, in a May 2013 Journal of Governance and Regulation article^[12] Pichet suggests a new central banking theory for the world’s older industrialised countries. The idea is that central bankers in the Global North failed to anticipate the crisis but were still able to adopt emergency measures saving the banking and financial systems: conventional measures such as massive cuts in interest rates (and a similarly massive injection of liquidities into the bank system in exchange for strong guarantees, i.e. financial assets with an at least BBB- rating); and non-conventional measures, including huge purchases of state debt. The article strongly criticises the European Central Bank’s May 2010 decision to purchase Greek state debt in large quantities (totalling €40 billion by 2013) at a time when the country was being downgraded. This policy ran counter to prudential doctrine, according to which central banks are only supposed to purchase investment grade assets. It also failed to lower Greek Treasury bond yields and exposed the ECB to heavy losses in case Greece defaulted. This contrasted with the actions taken by the US and UK central banks, who bought secure AA+ rated securities issued by their national governments.

Hence Pichet’s suggestion of a new doctrine appropriate for 21st century central banking, one redefining the concept of inflation to include not only consumer prices but also asset inflation, including shares, property and even bond market bubbles. There should also be a new tool distinguishing benign from dangerous asset inflation, with central banks being given a new mission of controlling leveraged asset price rises, based on the ready availability of short-term credit. Lastly, Pichet advocates reshaping central banks’ governance systems along three lines: independence (essential, notwithstanding certain actions taken by Japanese and Hungarian governments in 2013); accountability, based on greater strategic transparency; and redrawn boards of directors, not only featuring a better gender balance (an ongoing challenge, as witnessed by arguments about the BCE’s 100% male board) but also and above all by co-opting members from a wider range of backgrounds. In his view, it is clear that appointing governors without any trading experience was a major factor in the BCE’s strategic mistake of purchasing huge quantities of Greek state debt, subjecting taxpayers across the Eurozone to huge levels of risk.

Participation in taxation debates

Tax amnesty

In 2004, Pichet and attorney Maurice Christian Bergerès co-authored a study into the economic advantages of a tax amnesty.^[13]

July 2011 ISF wealth tax

In two studies published in La Revue du Droit Fiscal and relating to the 2011 reform of France’s ISF wealth tax,^[14] Pichet assessed the measure’s annual global cost when it was a mere bill in parliament^[15] before reassessing it once the law was enacted.^[16] These assessments showed that the reform was not in fact “the biggest gift ever made to the rich” as some politicians referred to it. His conclusion was that the reform was partially unfunded. It was expected to have a direct annual budgetary cost of around €350 million, plus an indirect cost of ca. €200 million, thus totally €550 million (a long way from the figure of €2 billion often quoted in the press.

Closure of tax loopholes

Applying his tax expenditure theory, in April 2012 Pichet has evaluated France’s 17 main loopholes, and suggested eliminating a number of them, including:

• 10% relief on an individual’s total pension pot (saving the French state €3 billion a year)
• De-taxation of overseas French territories (€1.1 billion)
• Overtime exemptions, as listed in the TEPA law (€1.4 billion)
• Exemption of sums paid out in the name of profit-sharing schemes (€1.1 billion)
• Employment premium (€3billion)
• Exemption of family allowances (€1.6 billion).

Conversely, to support employment, he suggests maintaining:

• R&D tax credits (costing €2.3 billion)
• 7% VAT for restaurants and housing refurbishment work (€8.4 billion)
• Tax credits on domestic help (€3 billion)
• Tax credits on household equipment spending (€1.4 billion).

Debates on the impact of the Responsibility and Solidarity Pact (2014-2017)

In summer 2014, he took part in the debate about the Responsibility Pact^[17] of French Public Finances from 2014-2017. He criticized the President HOLLANDE attitude towards the companies : “ The government is making another mistake, although purely ideological this time, by thinking about the responsibility pact in terms of contracts that would give rise to reciprocal concessions from companies. Indeed, the government cannot negotiate with companies because the decisions of business leaders are always individual. They are not civil servants working to orders, but free and lucid agents who make their decisions, particularly on investment and job creation, by individually assessing their risks based on the stability of the environment and the favourable outlook for returns on investment By contrast, an effective government can, and must, create the right circumstances for investment decisions to generate the conditions for growth.” He doubted the ambition and results of the Pact: “The Responsibility Pact announced by President HOLLANDE on 31 December 2013, marked a significant re-orientation of the five–year term, with the executive, under economic pressure, recognising the absolute necessity to help companies to effectively combat mass unemployment. However, the Responsibility Pact only has a rather modest aim for 2015-2017 as it provides for a reduction, not of public expenditure, but an increase (of €50bn out of an expected total of €120bn, or a net increase of €70bn over the period). Nevertheless, even if this re-orientation has some effect, it will not bring the public accounts back to balance by the end of the five-year term.”
Finally he compared the French budgetary situation with the other European countries: “In 2014, France is now the only country in the European Union and the Euro-zone to continue living beyond its means. Since the crisis, ‘peripheral’ countries such as Greece, Cyprus, Ireland, Portugal and Spain have painfully adapted their public sphere and in Italy, the RENZI government seems set on far-reaching reform. Structural reforms and respecting European treaties are the two pre-requisites to reduce deficits in the long-term and boost the economy’s potential growth rate which, at around 1%, is much lower than the government estimates (close to 4%). It is the French economy’s ‘corsets’ that are to blame for the country’s weak growth (both potential and recorded) which itself generates the deficits and not the austerity policies made necessary by galloping deficits as partisans of the so-called demand-led policy think. The French economy is primarily ill because of its public finances.

Debates on the consequences of the « Trente Dispendieuses »

“Trente Dispendieuses” (three decades of extravagant spending from 1981-2011).
After analysing the consequences of the political debates in Autumn 2014 around the 2014-2019 Public Finance Planning Act and the 2015 Budget Bill, Pichet foresaw a lengthening of the Trente dispendieuses onto Trente-six dispendieuses” or 36 years of uninterrupted French public deficits from 1981 to 2017.^[18]

Debates on the French structural public deficit

An article appearing in the 27 November 2014 issue of the Revue de Droit Fiscal has shown that the 2014 the French structural public deficit will be closer to 4% than the official 2.4%, due to the fact that the nation's growth potential has fallen by 1% per annum since the 2008 crisis broke out. This means it will be impossible to catch up with the pre-crisis growth trendline. Although the article contests neither the Haut Conseil des Finances Publiques' independence or competency, it does criticize this body's excessive caution and refusal to analyse the Government's calculations with any degree of seriousness. The Revue de Droit Fiscal article published in response by Mr. Migaud, in his capacity as Chair of the Haut Conseil des Finances Publiques, states that "Even if the Haut Conseil is not providing quantitative estimates for the output gap and structural deficit - estimates that would, by their very nature, be highly uncertain - it is clear in noting that the output gap that will be much lower than the one calculated by the Government, meaning that the structural deficit will be much higher".

Public asset research

A June 2005 study published in the Politiques et Management Public magazine^[19] suggested creating a new field of scientific research operating at the border between economics and financial analysis – public asset research, based on a methodology that would count all assets held by the State (including intangible assets such as telephone frequency rights), together with all debts, from the explicit (State debt as per the Maastricht definition) to the implicit, like pension liabilities for civil servants. Having assessed the French State’s net asset value at €1.1 trillion as of 1 January 2004, with total debt (implicit and explicit combined) reaching €2.5 trillion, the French State counted net liabilities of €1.4 trillion, much higher than in 1980.

Epistemology for the Social Sciences

Influenced by the thinking of Kurt Lewin, according to whom “Nothing is more practical than a good theory”, Pichet always tries to develop social science theories that have practical consequences. Also influenced by Paul Feyerabend, he maintains the necessity of a constructivist epistemology that is specific to social sciences.

"If we consider the most complex object in the universe (besides the universe itself) to be the human brain, then human societies, and particularly the societies of the hypermodern era into which we have entered and which are the fruit of the interaction of thousands of human minds, and even, since globalisation and the advent of the internet, of the interaction of billions of human minds, are far and away the most complex entities there are to study".^[20]

Publications

• 2001: Éric Pichet. Adam Smith, je connais !, Publisher : Mallard.
• 2003: Éric Pichet. Adam Smith, le père de l'économie, Publisher : Les éditions du siècle.
• 2004: Éric Pichet. Ricardo, le premier théoricien de l'économie, Publisher: Les éditions du siècle.
• 2005: Éric Pichet, avec Marie Grozieux de Laguerenne. Le Family Office, Publisher: Les éditions du siècle.
• 2007: Éric Pichet. Le guide pratique des obligations, 2ème édition, Publisher: SEFI.
• 2008: Éric Pichet. Le guide pratique de la Bourse, 3e édition, Publisher: SEFI.
• 2008: Éric Pichet. Les Hedge Funds : théorie et pratiques, Publisher: Les éditions du siècle.
• 2009: Éric Pichet. Le gouvernement d’entreprise dans les grandes sociétés cotées, Publisher: Les éditions du siècle.
• 2011: Éric Pichet. Le guide pratique des options et du Monep, 7e édition, Publisher: SEFI.
• 2011: Éric Pichet. L'art de l'HDR, Publisher: Les Éditions du Siècle.
• 2015: Éric Pichet. L'ISF 2015, théorie et pratiques, 16e édition, Publisher: Les Éditions du Siècle.
• 2015: Éric Pichet. L'impôt sur le revenu 2015, Théorie et Pratiques, 16e édition, Publisher: Les Éditions du Siècle.u

Eric Pichet has translated into French three of the leading books in American stock market literature:

• Reminiscences of a Stock Operator, by Edwin Lefèvre published in 1924 in the United States. The bible for traders describes the life of James Livermore and gives advice that have become part of finance vernacular such as 'shares are never too low to sell and never too high to buy'.
• A Random Walk Down Wall Street by Burton Malkiel.
• Where are the Customers Yachts ? by Schwed, Mais où sont les yachts des clients ?, which Éric Pichet often presents to his students as the funniest and most pertinent handbook on stock market wisdom, adding in the dedication 'Of all the books on finance, it’s the most useful, the funniest and Schwed has but one fault, he prefers gin to Bordeaux'.

External links

• Official website: www.ericpichet.fr.
• Article: La Fracture Bancaire, Le Nouvel Economiste
• Mais où sont les yachts des clients, preface, table of contents, notes from the translator
• Wealth tax in Investopedia Financial Dictionary
• Elena Salgado “The new wealth tax would not affect the middle classes”

References