Category Archives: Regulations

Globalization’s Wrong Turn

And How It Hurt America
By Dani Rodrik – Globalization is in trouble. A populist backlash, personified by U.S. President Donald Trump, is in full swing. A simmering trade war between China and the United States could easily boil over. Countries across Europe are shutting their borders to immigrants. Even globalization’s biggest boosters now concede that it has produced lopsided benefits and that something will have to change.

Today’s woes have their roots in the 1990s, when policymakers set the world on its current, hyperglobalist path, requiring domestic economies to be put in the service of the world economy instead of the other way around. In trade, the transformation was signaled by the creation of the World Trade Organization, in 1995. The WTO not only made it harder for countries to shield themselves from international competition but also reached into policy areas that international trade rules had not previously touched: agriculture, services, intellectual property, industrial policy, and health and sanitary regulations. Even more ambitious regional trade deals, such as the North American Free Trade Agreement, took off around the same time.

In finance, the change was marked by a fundamental shift in governments’ attitudes away from managing capital flows and toward liberalization. Pushed by the United States and global organizations such as the International Monetary Fund and the Organization for Economic Cooperation and Development, countries freed up vast quantities of short-term finance to slosh across borders in search of higher returns. more>

How European telcos are monitoring our online activity

The security and privacy of personal data are being jeopardized as Deep Packet Inspection is deployed by internet service providers.
By Katherine Barnett – Europe has not escaped the global move towards ‘surveillance capitalism’. Numerous pieces of legislation are under consideration which put online freedoms and privacy at risk—the UK’s Online Harms white paper is just one example.

The European Digital Rights (EDRi) organization recently discovered that European telcos were monitoring internet connections and traffic through a technique known as Deep Packet Inspection (DPI).

European telcos have so far escaped penalization for their use of DPI, on the grounds that it counts as ‘traffic management’. Under current net-neutrality law, it is technically allowed for purposes of network optimization—but its use for commercial or surveillance purposes is banned.

In January, however, the EDRi produced a report, outlining how as many as 186 European ISPs had been violating this constraint, using DPI to affect the pricing of certain data packages and to slow down internet services running over-capacity. Alongside 45 other NGOs and academics, it is pushing for the use of DPI to be terminated, having sent an open letter to EU authorities warning of the dangers.

Deep Packet Inspection is a method of inspecting traffic sent across a user’s network. It allows an ISP to see the contents of unencrypted data packets and grants it the ability to reroute or block traffic.

Data packets sent over a network are conventionally filtered by examining the ‘header’ of each packet, meaning the content of data traveling over the network remains private. They work like letters, with simple packet filtering allowing ISPs to see only the ‘address’ on the envelope but not the contents.

DPI however gives ISPs the ability to ‘open the envelope’ and view the contents of data packets. It can also be used to block or completely reroute data.

Regulators have so far turned a blind eye to this blatant disregard for net-neutrality law and telcos are pushing for DPI to be fully legalized.

This sparks major concerns about user privacy and security, as DPI renders visible all unencrypted data sent across a user’s connection, allowing ISPs to see browsing activity. more>

A primer on how Chinese law might enforce a US-China trade deal

By Jamie P. Horsley – As recently as early May, optimism ran high that the United States and China were nearing an agreement to resolve their escalating trade dispute. But talks have hit an impasse, with both sides announcing new rounds of tariffs over the past few days.

In an interview on Fox News Sunday, White House economic adviser Larry Kudlow explained that a key point of contention is U.S. insistence that Chinese commitments be “codified by law in China, not just a State Council announcement.” According to Kudlow, the U.S. seeks “very strong enforcement provisions” to correct past Chinese behavior on trade, which he characterized as unfair, nonreciprocal, and sometimes unlawful.

Various U.S. media reported that the Chinese side was averse to the idea of a foreign country dictating Chinese law. Instead, negotiators from Beijing reportedly offered to codify the agreement through regulatory and administrative actions. The standoff raises an important question: If the other substantive issues can be resolved, would an agreement be enforceable even if it falls short of being codified in national laws?

National laws, local regulations, State Council regulations, and rules are all part of what is collectively called “legislation” (lifa). National laws (falü) are adopted by China’s National People’s Congress (NPC) and the NPC Standing Committee pursuant to formal procedures—including public notice and comment—set forth in the Legislation Law.

Similarly, local regulations (difangxing fagui) are adopted by the people’s congress operating in a particular province or autonomous region. State Council regulations (xingzheng fagui), which are legally binding and enforceable, are also governed by the Legislation Law and subject to public comment and other procedures stipulated in State Council implementing regulations (colloquially, the “Rulemaking Regulations”).

The same applies to rules (guizhang), which are promulgated by central departments and local governments. more>

Why no-platforming is sometimes a justifiable position

By Neil Levy – The discussion over no-platforming is often presented as a debate between proponents of free speech, who think that the only appropriate response to bad speech is more speech, and those who think that speech can be harmful. I think this way of framing the debate is only half-right. Advocates of open speech emphasize evidence, but they overlook the ways in which the provision of a platform itself provides evidence.

No-platforming is when a person is prevented from contributing to a public debate, either through policy or protest, on the grounds that their beliefs are dangerous or unacceptable.

Open-speech advocates highlight what we might call first-order evidence: evidence for and against the arguments that the speakers make. But they overlook higher-order evidence.

Higher-order evidence is evidence about how beliefs were formed. We often moderate our confidence in our beliefs in the light of higher-order evidence. For instance, you might find the arguments in favor Continue reading

Updates from Chicago Booth

Trade policy is upending markets—but not investment
By Steven J. Davis – Trade-policy concerns became a major source of US stock market volatility in 2018. For example, the S&P 500 fell 2.5 percent on March 22, 2018, reacting to news about just-announced US tariffs on tens of billions of dollars of Chinese imports. Four days later, the index rose 2.7 percent on news the United States and China had begun trade negotiations. Still, tariffs and tariff threats between the two countries ratcheted upward over the next several months.

This prominence marks a striking change, as demonstrated in my research with Northwestern’s Scott R. Baker, Northwestern PhD candidate Marco Sammon, and Stanford’s Nicholas Bloom. We took a systematic look at the role of trade-policy developments and other news in large daily stock market moves. We first identified every daily move of 2.5 percent or more, up or down, in the US stock market. By this criterion, there were 1,112 large daily moves from 1900 to the end of 2018.

For each large move, we read next-day news articles in the Wall Street Journal to classify perceptions of what moved the market. The WSJ attributed seven of 1,103 large moves from 1900 to 2017 mainly to news about trade policy. But in a remarkable turnabout, the newspaper attributed three of nine large moves in 2018 to trade-policy news. From a historical perspective, the prominent role of trade policy in recent US stock market swings is highly unusual.

The highly visible US–China dispute is only one of the heightened trade-policy concerns behind the pattern we chart. The US has also become enmeshed in trade-policy disputes with several other major trading partners since Donald Trump became president.

How much do these heightened concerns affect capital-investment expenditures by US businesses? Not as much as you might think. more>

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How to govern a digitally networked world

Because the internet is a network of networks, its governing structures should be too. The world needs a digital co-governance order that engages public, civic and private leaders.
By Anne-Marie Slaughter and Fadi Chehadé – Governments built the current systems and institutions of international cooperation to address 19th- and 20th-century problems. But in today’s complex and fast-paced digital world, these structures cannot operate at ‘internet speed’.

Recognizing this, the United Nations secretary-general, António Guterres, last year assembled a high-level panel—co-chaired by Melinda Gates and the Alibaba co-founder Jack Ma—to propose ways to strengthen digital governance and cooperation. (Fadi Chehadé, co-author of this article, is also a member.) It is hoped that the panel’s final report, expected in June, will represent a significant step forward in managing the potential and risks of digital technologies.

Digital governance can mean many things, including the governance of everything in the physical world by digital means. We take it to mean the governance of the technology sector itself, and the specific issues raised by the collision of the digital and physical worlds (although digital technology and its close cousin, artificial intelligence, will soon permeate every sector).

Because the internet is a network of networks, its governing structures should be, too. Whereas we once imagined that a single institution could govern global security or the international monetary system, that is not practical in the digital world. No group of governments, and certainly no single government acting alone, can perform this task.

Instead, we need a digital co-governance order that engages public, civic and private leaders on the basis of three principles of participation.

First, governments must govern alongside the private and civic sectors in a more collaborative, dynamic and agile way.

Secondly, customers and users of digital technologies and platforms must learn how to embrace their responsibilities and assert their rights.

Thirdly, businesses must fulfill their responsibilities to all of their stakeholders, not just shareholders. more>

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>