Category Archives: Media

The great tax debate—the world is turning

When intellectual and moral arguments align, the global climate can change quickly. That’s what’s happening with the US tax debate.
By Atanas Pekanov and Miriam Rehm – Policy proposals by lawmakers in the United States have spurred a hotly contested debate on taxation among economists in recent weeks. The Democratic congresswoman Alexandria Ocasio-Cortez argued that the US needed to raise additional revenue by going back to marginal top-income tax rates of up to 70 per cent to fund social programs and a Green New Deal, while the Massachusetts senator Elizabeth Warren proposed a wealth tax of up to 3 per cent on the richest.

While opponents and some commentators have deemed such proposals radical or ideological, both are buttressed by economic research. Economists largely seem to agree on some basic facts: inequality within the US has been rising and the benefits of growth have accrued largely to the top 1 per cent, while the real incomes of what in America is called the middle class have stagnated over the past three decades.

There is also consensus that the progressivity of the income-tax system has been eroded in many countries since 1980 and that wealth is currently much more unequally distributed than income.

The recent economic debate has thus revolved around whether higher taxes on top incomes or for very wealthy people should be deployed to counteract these trends. American progressives argue that higher revenues are needed if the US aspires to become more like the role-model European welfare state, with more inclusive social systems and better public services, financed by top marginal income-tax rates of above 40 per cent (in most EU countries) and/or some form of wealth tax. While some have misrepresented these ideas, they would only burden very wealthy individuals. more>

European Parliament elections—battle for ‘Europe’s soul’?

The European Parliament election campaign is entering full swing—a detailed analysis of the platforms of the main European party groups and what the political consequences might be for the EU over the next five years.
By Miriam Sorace – In his speech at the December congress of the Party of European Socialists, Frans Timmermans, the current lead candidate for the PES, defined these elections as being about ‘the soul of Europe’. Eurosceptic forces made important gains in the 2014 election and are set to increase their seat share again in the upcoming one.

Overtly pro-European forces also seem set to make important gains in electoral support, and new pro-European forces are also forming (for example, the Italian More Europe party or the pan-European Volt). As overt position-taking over EU institutions and powers starts to even up (while in the past it was monopolized by anti-EU actors), we may be finally entering the era of EU political contestation.

Rocked by forces that want, respectively, less and more Europe, the 2019 election results have thus the potential to define the nature of the EU for years to come.

The member states are still responsible for the running of European Parliament (EP) elections, but national parties (especially the more established ones) will signal their Euro-party or European Party Group (EPG) affiliation during the campaign. EPGs are ‘umbrella organizations’ joined by ideologically-similar national parties to coordinate their EP activities.

Some EPGs are well-oiled machines, such as the European Peoples’ Party (EPP) and the Socialists and Democrats (S&D, formerly PES)—founded, respectively, in 1976 and 1973. Others are of very recent establishment, such as the Europe of Nations and Freedom (ENF) group, created by radical-right Eurosceptic parties in the aftermath of the 2014 elections. Being part of an EPG has its advantages: it makes it easier for a national party to get rapporteurships, speaking time and committee chairmanships (as well as funding for administration/staff). more>

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Updates from Chicago Booth

What causes stock market crashes, from Shanghai to Wall Street
By Michael Maiello – The Shanghai Stock Exchange reached a historic peak in June 2015, and then plunged, losing almost 40 percent of its value in a month. This crash of the world’s second-largest stock market evoked comparisons to the 1929 Wall Street collapse, and provided a laboratory for testing an enduring explanation of its causes.

It has long been theorized that the 1929 crash reflected “leverage-induced fire sales,” according to University of International Business and Economics’ Jiangze Bian, Chicago Booth’s Zhiguo He, Yale’s Kelly Shue, and Tsinghua University’s Hao Zhou. They acknowledge that the theory has been well-developed to explain how excessive leverage makes investors sell in emergency conditions, accelerating market crashes. But they suggest that, until now, the empirical research has been lacking—and the China crash finally offers empirical evidence.

The researchers analyzed account-level data for hundreds of thousands of investors in China’s stock market. Because leverage was introduced in mainland China only in 2010, Bian, He, Shue, and Zhou were able to examine the implications of leverage-limiting regulations imposed in this decade. During the first half of 2015, there were two sources of leverage for Chinese investors—regulated brokerage houses and nonregulated online lending platforms. The latter, along with other nonbank lenders such as trust companies, formed the shadow-banking industry in China. The researchers thus studied the effects of each type of borrowing. more>

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Faith and Religion in Public Life Are Not Replacements for Reform

By Chayenne Polimédio – Last week, religious leaders, humanitarians, and politicians came together at the Hilton Hotel in Washington, D.C., for a fellowship breakfast “in the spirit of Jesus.” The National Prayer Breakfast, held every year since 1953, is one of those moments—now rarer by the day—when political strife and division ostensibly take a back seat to prayer, calls for unity, and reminders of our shared identities. It’s also a reminder of how faith and public life are intertwined in a country where 70 percent of the population is Christian, and where the public’s trust in the church has always been greater than its trust in government.

But one need only think about recent headlines detailing a racist attack, a homophobic remark, or even broader political pettiness to question the extent to which the breaking of bread is enough to overcome the record-breaking level of division in American democracy.

The National Prayer Breakfast, in other words, is a reminder not of what kinds of positive changes faith is able to effect in public life, but of the kinds of changes it isn’t able to bring about. more>

How Trump’s Economic Chickens Are Finally Coming Home To Roost

By Steve Denning – Assisted by the least qualified White House staff in history, Trump has continued to breach conventional wisdom and practice. Yet Liberal analysts have watched with dismay as polls have showed stable support from Trump’s base, no matter how outrageous the behavior. Surely, they said, the economic reality of what Trump is up to must eventually kick in.

Now a trifecta of bad economic news for his base raises the question whether that time has finally arrived:

The comfort offered by Trump’s fictions is too seductive to be undermined by facts. To Trump’s base, the beautiful myth of “the Wall” is, and remains, more attractive than the real world.

In this way, “the Wall” has become a code-name for the racist, anti-immigrant isolationist policies of Trump’s presidency and a symbol of multiple toxic policies,

There’s a catch with the use of fictions in politics. “The chief disability of propaganda,” wrote Hannah Arendt in her classic book, The Origins of Totalitarianism, “is that it cannot fulfill the longing of the masses for a completely consistent, comprehensible, and predictable world without seriously conflicting with common sense.”

For a time, common sense can be held at bay and prevented from intruding into the cocoon of reassuring fiction. Yet the deliberate distortion of reality is also the cause of propaganda’s inevitable downfall. It is the inexorable collision with reality that eventually ruins the cocoon. It’s not a matter of whether. It’s only a question of when. more>

Democracy splutters—good governance under pressure

Amid political polarization and declining democratic standards, can OECD and EU countries sustain the good governance challenges such as globalization, social inequality and climate breakdown demand?
By Christof Schiller – Eroding standards of democracy and growing political polarization are severely hampering the implementation of sustainable reforms. This is one of the main findings in the Sustainable Governance Indicators (SGI) 2018 study by the Bertelsmann Foundation.

SGI is an international monitoring tool, which sheds light on the future viability of all 41 countries in the OECD and the European Union. On the basis of 140 indicators, we assess democratic standards, the quality of governance and reforms in the areas of economics, social affairs and the environment. More than 100 international experts are involved in our cross-national survey.

The most recent study highlights how waning standards of democracy and growing political polarisation hamper sustainable reform. Governments in countries including the United States, Hungary and Turkey are deliberately stoking social tensions rather than seeking consensus.

The report shows that the quality of democracy in many western industrial nations is waning, with democratic standards declining in 26 of the countries surveyed, compared with similar data from four years earlier. ‘Even within the OECD and the EU, the model of liberal democracy is subject to growing pressure—in some countries this means that even central democratic and constitutional standards such as media freedoms are already severely damaged or undermined,’ it finds.

Compounding this worrying trend, the study’s authors identify a simultaneous decline in the adequacy of governance, with many countries losing ground on key measures of good governance. more>

Tools for thinking: Isaiah Berlin’s two concepts of freedom

By Maria Kasmirli – ‘Freedom’ is a powerful word.

We all respond positively to it, and under its banner revolutions have been started, wars have been fought, and political campaigns are continually being waged.

But what exactly do we mean by ‘freedom’?

The fact that politicians of all parties claim to believe in freedom suggests that people don’t always have the same thing in mind when they talk about it.

Might there be different kinds of freedom and, if so, could the different kinds conflict with each other? Could the promotion of one kind of freedom limit another kind? Could people even be coerced in the name of freedom?

The 20th-century political philosopher Isaiah Berlin (1909-97) thought that the answer to both these questions was ‘Yes’, and in his essay ‘Two Concepts of Liberty’ (1958) he distinguished two kinds of freedom (or liberty; Berlin used the words interchangeably), which he called negativefreedom and positive freedom.

Negative freedom is freedom from interference. You are negatively free to the extent that other people do not restrict what you can do. If other people prevent you from doing something, either directly by what they do, or indirectly by supporting social and economic arrangements that disadvantage you, then to that extent they restrict your negative freedom.

Berlin stresses that it is only restrictions imposed by other people that count as limitations of one’s freedom. Restrictions due to natural causes do not count. The fact that I cannot levitate is a physical limitation but not a limitation of my freedom. more>

They Don’t Just Hide Their Money. Economist Says Most of Billionaire Wealth is Unearned.

By Didier Jacobs – The 62 richest people in the world own as much wealth as half of humanity. Such extreme wealth conjures images of both fat cats and deserving entrepreneurs. So where did so much money come from?

It turns out, three-fourths of extreme wealth in the US falls on the fat cat side.

A key empirical question in the inequality debate is to what extent rich people derive their wealth from “rents”, which is windfall income they did not produce, as opposed to activities creating true economic benefit.

Economists define “rent” as the difference between what people are paid and what they would have to be paid to do the work anyway. The classical example is the farmer who owns particularly fertile land.

With the same effort, she can produce more than other farmers working on land of average productivity. The extra income she gets is a rent. Monopolists also get rent by overcharging customers as compared to what they could charge in competitive markets.

More generally, economists have identified a series of “market failures”, which are situations where full competition does not prevail and where someone can therefore overcharge – they would be ready to do the work for less, but lack of competition allows them to make a quick extra buck. Government can alleviate market failures through proper economic regulation; or it can make them worse.

Political scientists define “rent-seeking” as influencing government to get special privileges, such as subsidies or exclusive production licenses, to capture income and wealth produced by others.

So how much of extreme wealth derives from rents? more>

A New Americanism

Why a Nation Needs a National Story
By Jill Lepore – Carl Degler issued a warning: “If we historians fail to provide a nationally defined history, others less critical and less informed will take over the job for us.”

The nation-state was in decline, said the wise men of the time. The world had grown global. Why bother to study the nation?

Francis Fukuyama is a political scientist, not a historian. But his 1989 essay “The End of History?” illustrated Degler’s point. Fascism and communism were dead, Fukuyama announced at the end of the Cold War.

Fukuyama was hardly alone in pronouncing nationalism all but dead. A lot of other people had, too. That’s what worried Degler.

Nation-states, when they form, imagine a past. That, at least in part, accounts for why modern historical writing arose with the nation-state.

But in the 1970s, studying the nation fell out of favor in the American historical profession. Most historians started looking at either smaller or bigger things, investigating the experiences and cultures of social groups or taking the broad vantage promised by global history.

But meanwhile, who was doing the work of providing a legible past and a plausible future—a nation—to the people who lived in the United States? Charlatans, stooges, and tyrants.

The endurance of nationalism proves that there’s never any shortage of blackguards willing to prop up people’s sense of themselves and their destiny with a tissue of myths and prophecies, prejudices and hatreds, or to empty out old rubbish bags full of festering resentments and calls to violence.

When historians abandon the study of the nation, when scholars stop trying to write a common history for a people, nationalism doesn’t die. Instead, it eats liberalism.

Maybe it’s too late to restore a common history, too late for historians to make a difference. But is there any option other than to try to craft a new American history—one that could foster a new Americanism? more>

Updates from Chicago Booth

The safest bank the Fed won’t sanction – A ‘narrow bank’ offers security against financial crises
By John H. Cochrane – One might expect that those in charge of banking policy in the United States would celebrate the concept of a “narrow bank.” A narrow bank takes deposits and invests only in interest-paying reserves at the Fed. A narrow bank cannot fail unless the US Treasury or Federal Reserve fails. A narrow bank cannot lose money on its assets. It cannot suffer a run. If people want their money back, they can all have it, instantly. A narrow bank needs essentially no asset risk regulation, stress tests, or anything else.

A narrow bank would fill an important niche. Right now, individuals can have federally insured bank accounts, but large businesses need to handle amounts of cash far above deposit insurance limits. For that reason, large businesses invest in repurchase agreements, short-term commercial paper, and all the other forms of short-term debt that blew up in the 2008 financial crisis. These assets are safer than bank accounts, but, as we saw, not completely safe.

A narrow bank is completely safe without deposit insurance. And with the option of a narrow bank, the only reason for companies to invest in these other arrangements is to try to harvest a little more interest. Regulators can feel a lot more confident shutting down run-prone alternatives if narrow bank deposits are widely available. more>

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