Category Archives: Regulations

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

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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But Can The Government Afford It?

By John T. Harvey – We’ve been hearing that a lot lately, being asked about things like the proposed U.S.-Mexico border wall, the possibility of universal health care, and even regarding existing programs like Social Security. It’s a relevant question, to be sure, but 99 times out of 100 (or maybe 999 out of 1000), the context in which it is placed is completely wrong.

I say this because the question is almost always asked regarding whether or not we have enough money. If there is one place where the economics discipline has most substantially let down the general public, it’s in explaining how the financial sector works.

Long story short: money is not a scarce resource. Labor is, oil is, clean water is. Money is not.

Money can be and is created with a keystroke, just as easily as I am typing these words. This is true in both the public and private sectors. The private sector creates brand new money every time someone takes out a loan.

It is a widespread belief that banks simply loan out people’s savings. Certainly that’s part of what they do, but only a very small part. Imagine if we really had to wait for people to save up enough cash for entrepreneurs to build restaurants, shopping centers, movie theaters, car dealerships, etc. Economic expansions would be very few and very weak.

Fortunately, that’s not what happens. Instead, when banks make loans, they simply create a deposit for the borrower out of thin air. Their only problem then is meeting the government’s reserve requirement. However, if the Federal Reserve wants to hit its interest rate target, it must supply those reserves (because if it doesn’t, banks will find themselves short of reserves which will drive up interest rates as they compete for them).

If the bank agrees that you have a clever idea, the money to fund it will be created. more>

Europe’s energy transition must steer towards social justice

By Kristian Krieger, Marie Delair and Pierre Jean Coulon – The fundamental transformation of Europe’s economies towards carbon neutrality does not however present only a vast technological challenge. The popular demonstrations by the gilets jaunes in France against increasing fuel taxes testified to a feeling of fiscal unfairness surrounding the energy transition. Local resistance against offshore wind is another indication of the political difficulty of turning Europe’s economies upside-down within an extremely tight time-frame.

Critically, as with any major transformation, benefits and risks are unevenly distributed regionally and socially across Europe. By focusing on market integration, climate change and energy security, the political system struggles to pay sufficient attention to the social dimension of the energy transition.

A case in point is energy poverty, where individuals are not able to afford services they need—heat, light, air-conditioning and so on—in their homes. It is estimated that about 10 per cent of the EU population might be affected.

Progress within EU policy-making has been slow. Even though energy poverty became a legally recognized concept in 2009 with the Third Energy Package, the legislation did not translate into substantive, binding obligations on member states or concrete actions addressing the challenge.

Where governments lag behind, civil society emerges as a main advocate, raising awareness at European level. more>

Updates from ITU

New ITU standards bring broadband to places as remote as Mount Everest
ITU News – New ITU standards aim to bring high-speed broadband services to rural communities with lightweight, terabit-capable optical cable that can be deployed on the ground’s surface with minimal expense and environmental impact.

The standards are giving developing countries the confidence to consider the roll-out of optical networks in some of the world’s most challenging conditions.

Nepal, for example, has highlighted its intention to use ITU-standardized lightweight optical cable to connect places as remote as Mount Everest Base Camp and Annapurna Trekking Trail.

Why lightweight optical cable?

Satellite communications are characterized by high latency, struggling to support the interactive services associated with broadband. Radiocommunications can provide ‘last-mile’ connectivity. But in the broadband era, optical infrastructure is indispensable – rural communities are often many, many kilometers away from core networks.

The Editor of the new standards, Haruo Okamura of Waseda University, offers a compelling example: “Optical cable is becoming an absolute must for telemedicine. Only optical cable provides capacity high enough and latency low enough for the live transmission of HD medical imagery to remote medical professionals.”

The installation of ultra-high speed optical networks, however, comes with a great deal of cost and complexity.

“Today the costs of optical cable installation are typically 70 to 80 per cent of the entire CAPEX of the network,” says Okamura. “The designs of conventional optical cables are specific to their installation environment – whether duct, directly buried, lashed aerial or submerged – with installation methods relying on specialized machinery and skilled labor.”

This challenge is made even greater by the low densities of remote rural communities, where fiber roll-outs demand a disproportionate level of initial capital investment relative to the potential return on such investment.

New ITU standards aim to change that equation by providing a low-cost ‘do-it-yourself’ solution able to be deployed in even the world’s most remote areas. more>

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How Bronze Age Rulers Simply Canceled Debts

By Michael Hudson – My book And forgive them their debts”: Lending, Foreclosure and Redemption from Bronze Age Finance to the Jubilee Year  is about the origins of economic organization ad enterprise in the Bronze Age, and how it shaped the Bible. It’s not about modern economies. But the problem is – as the reviewer mentioned – that the Bronze Age and early Western civilization was shaped so differently from what we think of as logical and normal, that one almost has to rewire one’s brain to see how differently the archaic view of economic survival and enterprise was.

Credit economies existed long before money and coinage. These economies were agricultural. Grain was the main means of payment – but it was only paid once a year, at harvest time. You can imagine how awkward it would be to carry around grain in your pocket and measure it out every time you had a beer.

We know how Sumerians and Babylonians paid for their beer (which they drank through straws, and which was cleaner than the local water). The ale-woman marked it up on the tab she kept. The tab had to be paid at harvest time, on the threshing floor, when the grain was nice and fresh. The ale-woman then paid the palace or temple for its advance of wholesale beer for her to retail during the year.

If the crops failed, or if there was a flood or drought, or a military battle, the cultivators couldn’t pay. So what was the ruler to do? If he said, “You owe the tax collector, and can’t pay. Now you have to become his slave and let him foreclose on your land.”

Suddenly, you would have had a slave society. The cultivators couldn’t serve in the army, and couldn’t perform their corvée duties to build local infrastructure.

To avoid this, the ruler simply cancelled the debts (most of which were owed ultimately to the palace and its collectors). The cultivators didn’t have to pay the ale-women. And the ale women didn’t have to pay the palace.

All this was spelled out in the Clean Slate proclamations by rulers of Hammurabi’s dynasty in Babylonia (2000-1600 BC), and neighboring Near Eastern realms. They recognized that there was a cycle of buildup of debt, reaching an unpayably high overhead, followed by a cancellation to restore the status quo ante in balance.

This concept is very hard for Westerners to understand. more>

Updates from ITU

New Measuring the Information Society Report 2018 shows big progress, big gaps
ITU News – More and more people worldwide have access to and are using the Internet. At the same time, ICT prices have dropped globally in the last decade. However, stronger information and communication technology (ICT) skills are needed to connect people everywhere.

These are some of the top highlights in ITU’s new Measuring the Information Society Report 2018, released today.

The MIS Report also finds that improved ICT regulation and policy-making have played a pivotal role in creating the conditions for the reduction of prices, ensuring that part of the efficiency gains of higher ICT adoption are passed on to consumers.

“This year’s report shows how increased investment in broadband technologies is driving the global digital transformation and enabling more people to access a myriad of services at the click of a button,” says ITU Secretary-General Houlin Zhao.

The report finds that there continues to be a general upward trend in the access to and use of ICTs. Most importantly, the world has crossed the halfway line in terms of Internet use, with 51.2 per cent of the world population using the Internet by the end of 2018. more>

Why Inequality Matters

By Thorvaldur Gylfason – Since the early 1970s, the share of national income paid to workers in advanced economies has fallen from 55 to 40 percent. A declining labor share goes along with increased inequality in the distribution of income and wealth as well as health. Medical researchers report that the wealthiest one percent of American men live 15 years longer than the poorest one percent and that the wealthiest one percent of American women can expect to live ten years longer than their poorer counterparts. The gap is widening.

Concerns about inequality have recently been thrust to the forefront of political discourse around the world. An important part of the explanation for the surprise victory of Donald Trump in the 2016 US presidential election is that he did well among those voters who felt they had been left behind with stagnant real wages for decades while CEO compensation rose from 20 times the typical worker’s compensation in 1965 to 270 in 2008.

What could workers do?

As film maker Michael Moore puts it, they could throw Molotov cocktails at the powers that be. Trump was their Molotov. Similarly, in the 2016 referendum in the UK, those who felt left behind tended to vote for Brexit. more>

Updates from Chicago Booth

Why we’re all impact investors now
By Chana R. Schoenberger – Laurence “Larry” Fink, the founder and CEO of BlackRock, the world’s largest asset manager, which has more than $6 trillion in assets under management, issued an open letter to CEOs this past January—and reportedly sent many of them into a tizzy.

Fink’s letter said society is demanding that companies, public and private, need to “serve a social purpose,” benefiting not just shareholders but also employees, customers, and neighbors. And, he explained, from that point forward, BlackRock would be “eager to participate in discussions about long-term value creation and work to build a better framework for serving all your stakeholders.”

Executives, he wrote, should be able to answer their questions about the company’s actions. For example, what role does the company play in the community? How is it managing its impact on the environment? Is it working to create a diverse workforce?

“The time has come for a new model of shareholder engagement,” he wrote.

For nearly 50 years, many have been guided by the idea, laid out most famously by Milton Friedman, that the most appropriate way to create social change is to give profits to investors, and taxes to the government, and use that money to make an impact. more>

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