Category Archives: Regulations

Updates from Chicago Booth

What Is the Line Between Self-Interest and Selfishness?
The debate has raged for 300 years and counting.
By John Paul Rollert – The pursuit of self-interest. Sounds like a harmless phrase, right? And yet no matter of modern political economy is more subject to controversy than the moral status of this motive force. What should we make of it?

In my business ethics classes, I tell A Tale of the Two Shirts, an allegory of sorts for the ethics of self-interest and its evolution over the past few hundred years. To set the stage, I take my students back to the 18th century, to the dispute that most inflamed the earliest days of capitalism: whether to embrace commercial self-interest at all.

An infamous fable

Long before paeans to self-interest were a mainstay of microeconomics classes, the instinct was strictly frowned upon. To declare that a zeal for one’s personal affairs should be the spur to a thriving society was to effectively announce that one was wicked and insane. Wicked, because the notion that an individual should be guided by what is best for himself rather than the people around him smacked of the devil’s business. Insane, because the idea that a community propelled by such an instinct wouldn’t soon collapse into chaos was so entirely counterintuitive as to be ridiculous on its face. If, as the philosopher Thomas Hobbes maintained, a world ungoverned by the iron fist of some central authority soon gave way to a war of all against all, private pursuits were a luxury no society could afford. more>

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Updates from McKinsey

The rise and rise of the global balance sheet: How productively are we using our wealth?
Net worth has tripled since 2000, but the increase mainly reflects valuation gains in real assets, especially real estate, rather than investment in productive assets that drive our economies.
By Jonathan Woetzel, Jan Mischke, Anu Madgavkar, Eckart Windhagen, Sven Smit, Michael Birshan, Szabolcs Kemeny, and Rebecca J. Anderson – We have borrowed a page from the corporate world—namely, the balance sheet—to take stock of the underlying health and resilience of the global economy as it begins to rebound from the COVID-19 pandemic. This view from the balance sheet complements more typical approaches based on GDP, capital investment levels, and other measures of economic flows that reflect changes in economic value. Our report, The rise of the global balance sheet: How productively are we using our wealth?, provides an in-depth look at the global economy after two decades of financial turbulence and more than ten years of heavy central bank intervention, punctuated by the pandemic.

Across ten countries that account for about 60 percent of global GDP—Australia, Canada, China, France, Germany, Japan, Mexico, Sweden, the United Kingdom, and the United States—the historic link between the growth of net worth and the growth of GDP no longer holds. While economic growth has been tepid over the past two decades in advanced economies, balance sheets and net worth that have long tracked it have tripled in size. This divergence emerged as asset prices rose—but not as a result of 21st-century trends like the growing digitization of the economy.

Rather, in an economy increasingly propelled by intangible assets like software and other intellectual property, a glut of savings has struggled to find investments offering sufficient economic returns and lasting value to investors. These savings have found their way instead into real estate, which in 2020 accounted for two-thirds of net worth. Other fixed assets that can drive economic growth made up only about 20 percent the total. Moreover, asset values are now nearly 50 percent higher than the long-run average relative to income. And for every $1 in net new investment over the past 20 years, overall liabilities have grown by almost $4, of which about $2 is debt. more>

So where’s Europe’s real source of strength?

By Justin Urquhart Stewart – We are all familiar with the large political behemoths that dominate our globe, not just in terms of political influence, but also through their financial strength. The United States, although having a federal structure, has power centered very clearly on Washington. The same would apply to the other superpower, namely China, albeit under a completely different totalitarian political system. As events in Hong Kong have so perfectly illustrated, any thought of an alternative political view or opinion, let alone action, will not be tolerated.

We should also mention Russia, who although no longer a superpower, is still formidable and a potentially dangerous entity. By way of illustration, the value of the entire economy of this geographical giant, as measured by its GDP (Gross Domestic Product) is less than half of that of Germany. It, too, despite nominally titling itself as a democratic nation, is quite obviously under a firm central system of Putin’s command and control.

These three, therefore, stand in great contrast to the real strength and opportunity supplied by the structure of the EU. Since its birth back in the 1950s, some have desired and dreamt of creating an alternative to the US via “a United States of Europe”, with a similar centralized strength and concentration of power in order to combat those other leviathans. more>

Updates from McKinsey

The energy transition unfolds
The transition to zero-carbon energy isn’t going to be a single shift, but a set of interrelated, system-level shifts. What will it take to get things moving quickly toward net-zero emissions?
McKinsey –  Decarbonizing the world’s economy will largely be a matter of overhauling the global energy system. And the necessary changes made to policies, technology, finance, and business models will affect the way that all individuals and all institutions produce and use energy.

Today McKinsey convened leaders from different points in the energy system to share observations on the state of the energy transition and the factors that might accelerate it. A few of the comments made during the session, edited for clarity, appear below. A full replay of today’s session can be found here.

Charting green hydrogen’s path to affordability: “The starting point is stone age: little [electrolyzer] units made by hand welding and hand cutting. The minute we are able to automate a process, with robotic welding machines and long factories assembling fast, phenomenal scale will come in. In renewable energy, the price has come down. Producers still need to bring down the cost of the electrolyzer and the balance of the system. We are very confident. … There is no reason why green hydrogen cannot end up competing with gray hydrogen. No reason whatsoever.”
—Paddy Padmanathan, president and CEO, ACWA Power

Rethinking the financial risk of new technologies: “We’ve had a long period when the perceived risk associated with new solutions for the climate problem has been higher than it really is. Now we’re starting to get to a point where that is tipping. It’s becoming obvious how carbon capture and storage, hydrogen, and direct-air capture are fitting into the climate equation. And therefore finance can start to factor them into credible transition pathways for clients.”
—Zoë Knight, managing director and group head, Centre of Sustainable Finance, HSBC more>

Are Policymakers Being Too Patient on Inflation Risk?

The Fed is modestly tapping the brakes on monetary stimulus, but will it do enough to cool a stock market that may be at risk of overheating?
By Lisa Shalett – The Federal Reserve last week made its highly anticipated announcement on “tapering” its asset purchases, the first step in pulling back on the unprecedented support it provided markets and the economy early in the pandemic. Later this month, the Fed will begin reducing its $120 billion-per-month asset-buying program by $15 billion a month.

In his announcement, Fed Chair Jerome Powell largely kept to the script, hitting consensus expectations spot-on regarding the pace of tapering. Powell also acknowledged that the risk of inflation may not be as transitory as the Fed had anticipated earlier this year. But he left interest rate hikes for another day, stressing patience as well as a need for the job market to get back to “maximum employment” before any hikes took place. Stocks rallied to yet more new highs in response to the broadly dovish communique.

Although the Fed is working with some uncertainty around policy choices, we are concerned that the Fed’s emphasis on patience remains disconnected from actual economic data, which could possibly result in policymaking that’s late in raising rates to tame inflation. Consider the following points:
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Capitalism’s Core Problem: The Case for Universal Property

Capitalism’s most grie­vous flaws are, at root, problems of property rights and must be ad­dres­­sed at that level.
By Peter Barnes – Capitalism as we know it has two egregious flaws: it relentlessly widens inequality and destroys nature.  Its ‘invisible hand,’ which is supposed to transform individual self-seeking into widely shared well-being, too often doesn’t, and governments can’t keep up with the consequences.  For billions of people around the world, the challenge of our era is to repair or replace capitalism before its cumulative harms become irreparable.

Among those who would repair capitalism, policy ideas abound.  Typically, they involve more government regulations, taxes and spending.  Few, if any, would fundamentally alter the dynamics of markets themselves.  Among those who would replace capitalism, many would nationalize a good deal of private property and expand government’s role in regulating the rest.

This book explores the terrain midway between repairing and re­pla­cing capitalism.  It envisions a transformed market economy in which private property and businesses are complemented by universal property and fiduciary trusts whose beneficiaries are future generations and all living persons equally.

Economists wrangle over monetary, fiscal and regulatory policies but pay little attention to property rights. Their models all assume that property rights remain just as they are forever.  But this needn’t and shouldn’t be the case.  My premise is that capitalism’s most grie­vous flaws are, at root, problems of property rights and must be ad­dres­­sed at that level.

Property rights in modern economies are grants by governments of permission to use, lease, sell or bequeath specific assets — and just as importantly, to exclude others from doing those things.  The assets involved can be tangible, like land and machinery, or intangible, like shares of stock or songs. more>

The search for alien tech

There’s a new plan to find extraterrestrial civilisations by the way they live. But if we can see them, can they see us?
By Corey S Powell – Are we alone in the Universe? And if not, should we be excited – or afraid? These questions are as immediate as the latest Netflix hit and as primal as the ancient myths that associated the planets with spirits and gods. In 1686, Bernard le Bovier de Fontenelle, the long-term secretary to the French Academy of Sciences, put an Enlightenment stamp on speculations about alien life with his book Entretiens sur la pluralité des mondes (Conversations on the Plurality of Worlds). In a series of spirited philosophical conversations, he declared that ‘it would be very strange for the Earth to be so well inhabited, and the other planets perfectly solitary’, and argued that alien beings might attempt to communicate with us or even visit us using some advanced form of flight.

Ever since, each age has featured its own version yearning for contact with life from beyond, always anchored to the technological themes of the day. In 1818, the German mathematician Carl Friedrich Gauss proposed communicating with aliens using a heliotrope, a system of mirrors that he devised to send coded signals using reflected sunlight. After the development of early electric lights, the French inventor Charles Cros suggested that such lamps could be amplified to beam messages to Venus or Mars. Nikola Tesla wrote in 1900 that ‘interplanetary communication has entered the stage of probability’ using newfangled radio waves. A year later, he reported that he had detected likely signals broadcast from another world.

Then the search got stuck. Radio persisted as the alien-hunting medium of choice, even as technology continued to change faster than ever. A full century after Tesla, researchers engaged in the search for extraterrestrial intelligence (commonly shortened to SETI) were still scanning the heavens with antennas and listening for artificial radio transmissions incoming from other worlds. The efforts led to ever-tightening statistical upper limits and a handful of briefly exciting false alarms, but mostly a whole lot of nothing. more>

Updates from Chicago Booth

Don’t rely on central banks to fight climate change
By Jeff Cockrell – In late August, five members of the US House of Representatives issued a statement urging President Joe Biden not to reappoint Jerome Powell, the chairman of the Federal Reserve, when his term expires in February 2022. The group, which included Alexandria Ocasio-Cortez (Democrat of New York), cited two concerns with Powell’s leadership: the Fed’s relaxation of banking regulations and its lack of action “to mitigate the risk climate change poses to our financial system.”

Ocasio-Cortez and her fellow members of Congress are not the first to suggest that central banks—whose policies have traditionally focused on objectives such as price stability and low unemployment—have a role to play in fighting climate change. The British Parliament’s Environmental Audit Committee (EAC) has encouraged the Bank of England to conduct its bond purchases with borrowers’ carbon emissions in mind. Many central banks themselves have also accepted some responsibility for fighting climate change: the European Central Bank says it is “committed to taking the impact of climate change into consideration in our monetary policy framework.”

But Chicago Booth’s Lars Peter Hansen cautions that monetary policy is a weak substitute for fiscal policy, which is far better suited to address climate change through tools such as carbon taxation and investment in green technologies. Asking central bankers to step in where fiscal policy makers can’t or won’t risks exposing central banks to reputational damage and a loss of political independence, he argues. more>

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The looming harm of tax harmonization

By Akvile Jaseviciute and Bhuvam Patel – The OECD’s proposals to harmonize international tax regimes were generally welcomed by governments without considering potential benefits of tax competitiveness. Blinded by their wish to stop multinational corporations from moving their business to jurisdictions with more favorable tax regimes, few considered the practical implications of OECD’s plans. Currently, OECD countries have divergent tax regimes – the 2021 edition of the International Tax Competition Index produced by the Tax Foundation ranked countries regarding tax competitiveness. Estonia earned the top spot in the ranking because of its relatively low corporate tax rate, while Italy and France fared poorly due to features like punitive wealth and financial transaction taxes. We hence question, why countries with favorable tax systems should be held back by a harmonized but uncompetitive tax regime?

OECD Proposal Problems

Current OECD proposals on tax harmonization focus on ending the perceived tax ‘unfairness’ while providing little practical benefits. The first Pillar aims to set tax brackets universally on companies making global sales above €20 Billion and profit margins of more than 10%. However, in practice, large companies often place the taxpaying burden on other stakeholders – employees or investors. Therefore, instead of benefiting the most vulnerable, the proposal could be detrimental to workers as companies choose to cut wages instead of letting their revenues shrink. If insufficiently considered, such an outcome could further disadvantage low qualification workers, which are already significantly affected by the Covid-19 pandemic. more>

Integration or isolation for the EU?

By Genc Pollo – Last week, European Commission President Ursula von der Leyen visited Albania and other Western Balkan countries. Her main political message was that the future of our countries is within the European Union. Regarding Tirana and Skopje, she said that she was personally determined that the EU intergovernmental conference for the opening of accession negotiations should be convened as soon as possible, preferably within this year. She promised that the path towards a common future would be outlined at the Ljubljana summit with the leaders of the European Union together with their peers from the Balkans.

In parallel with these statements, the new agency Reuters reported that the EU had not agreed to guarantee to the Western Balkan countries the prospect of membership at the Ljubljana summit.

The two-page letter of invitation to the summit, signed by European Council President Charles Michel in the last paragraphs said that on the second day, October 6, there will talk about the Balkans, the need to stabilize the region, the current social-economic developments after the pandemic, strategic cooperation, etc. No word on EU enlargement, the future membership of our countries. Meanwhile, for Slovenian Prime Minister Janez Jansa (Slovenia currently holds the six-month presidency of the European Union), EU enlargement in the Balkans was the first and only objective of this summit, which was initiated by him.

The latest from Ljubljana is, in the end, the word ‘enlargement made it to the summit declaration. more>