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The following appeared in this week's The Economist "Free Exchange" column. http://www.economist.com/news/finance-and-economics/21601841-economists-everywhere-should-mourn-passing-gary-becker-great-trailblazer
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I agree with everything that is said in this and Becker's post but am dismayed at the triumphalist tone, especially in Beckers piece. I am reminded of hubris evident in the photo of George W Bush on the aircraft carrier "Mission Accomplished" when I read this stuff. It was hubris like this about capitalism and markets that was fundamentally responsible for the crisis. Yes capitalism survived and will survive but surviving (and in the US and Western Europe it can be put no higher than that) hardly merits the congratulatory "high 5s" of this piece. Also capitalism has little to do with the survival of big US banks. Given the position that the authors hold as well informed economics commentators, a more critical stance towards the failings revealed by the crisis might be of more value.
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I have long been a fan of Becner but this post is pretty lame. To begin with Becker's notion of expensing capital. Most capital expenditure has been financed which makes sense: match the benefits to the cost. Becker suggests allowing as an expense now an expenditure that will produce income for a period of years and was probably acquired in part with borrowed money over a period of years. Why? Surely it would be enough to get rid of accelerated depreciation. Even Italians in the renaissance saw the need to depreciate long life assets over time. They both wistfully suggest a VAT might be worthwhile while ignoring the history of the VAT everywhere else. Lots of poor countries have brought in VAT as a price of joining the European Union but that hardly seems likely to happen to the US. Canada brought in a VAT but got rid of a stupid tax: the Manufacturer's Sales Tax instead. Likewise Australia which used its VAT to get rid of a raft of stupid state transaction based taxes. What do Becner propose? Use VAT to lower taxes on capital. That is to say that the poor who have no savings to speak of will pay the taxes of the rich who do. When a poor person borrows to buy something, a car or house, the purchase will be subject to VAT. The interest the poor pay to the well to do will not be subject to tax as this is distortionary to capital expenditure and some how makes the poor poorer. Then there is the cascading effect of a VAT in a federal system that features sales taxes. Canada after more than 10 years is only just getting to grips with this. Becner don't discuss it at all. All in all a disappointing post.
Toggle Commented Jun 17, 2013 on Tax Reform—Posner at The Becker-Posner Blog
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"Keynes urged devaluation of the pound against the dollar in the 1920s in order to stimulate the stagnant British economy, but the British Treasury refused because of Britain’s very substantial foreign investments, which would be worth less if the pound were weaker." How is that again? If the pound is less valuable relative to other currencies how can it be that overseas investments (presumably not denominated in pounds) would be worth less because of a devaluation of the pound? Surely they would be worth more to an English investor. The investments that foreigners have made in England would be worth less by reason of a de-valuation. It hardly seems likely that the British treasury made a mistake of this nature.
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"It’s difficult to understand why illegal immigration from Mexico is considered by so many Americans a very serious problem. The idea that illegal Mexican immigrants take jobs away from Americans appears to be largely false, as it seems that most of the jobs they get in the United States, notably in agriculture, are not attractive to Americans." All of this is true but beside the point. Here is Australia we are spending hundreds of millions of dollars on a pointless exercise of trying to deter boat arrivals by putting them in concentration camps while their papers are processed. This is the political cost that must be paid for an otherwise sensible immigration policy. A head tax of $50,000 or whatever per migrant would only make sense if you could be sure that you would get the immigrants you need by auctioning off places in this manner or you were really hard up for money. Otherwise the merit based system would serve your purposes much better.
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A good summary of the incentives inherent in banking and how they might bring about undesirable results. Missing is any sence that there is in fact a public good in "maturity transformation" i.e. borrowing short and lending long, a major source of risk in banking. Many will not lend except on condition that they can obtain instant or quick access to their money. Many will no borrow on terms that the bank may call the loan at a moment's notice. The result of the natural order of things is that some economically useful loans are not made and some capital is sterilised. It is for this reason, among others, that governments around the world support banking by guaranteeing bank creditors (formally just depositors but that means pretty much everybody in reality) and in return regulating bank risk making maturity transformation possible if not absolutely safe. Historically banking and bankers have been considered rather dull. Indeed they cultivated that image so as to give a picture of "soundness" to would be depositors. It is only in the past 20 years or so that banking has come to be associated with predatory animals. Perhaps the good judge might have spent some time discussing how this change came about.
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The main problem with public goods is one of measuring their value. Public Value can be diffuse and permeate all but the very primitive activities in economic life such as law and order. Rule of law is fundamental to our way of life. It is obviously worth something but how much? Other public goods keep on giving for a time horizon well beyond that capable of being measured by a yield curve. The US interstate road network was laid out in the Eisenhower era and it keeps on giving even as it deteriorates from lack of maintenance. An educated workforce has qualities of being of value through-out the economy and of that value not being realised until years after the investment has taken place. Thus it is often a tempting target to be cutback by the short-sighted or in a fiscal emergency. This makes justifying public expenditure something of an act of faith. Past experience tells us that public expenditure can pay dividends well into the future but where to spend and how much is much more difficult to measure. It calls for a degree of judgement and a willingness to make decisions in the face of uncertainty that is becoming absent from political discourse these days.
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In Australia we experienced a shortage of doctors because of the determination of newly graduated doctors to no longer work the punishing 60 hour plus work weeks of the previous generation. Female doctors wanting to start a family may have been a factor as well. That is the numbers were adequate but they did not work sufficient hours to meet demand.
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I agree with the observer above. I can't see how anyone could have expected a V shaped recovery after the kind of crash we experienced. Likewise "uncertainty" is less about this or that program or proposal than about the ability of the political system as a whole to come up with any sensible solution to any major political or economic issue.
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Internet stocks are a special case of supply/demand mismatch. Social networks don't need much capital compared to say mining or manufacturing companies, while many investors believe that they must have have at least a few of the latest offerings from the 'net. Fortunately the internet sector is a small one relative to say real estate and and is not one that encourages margin borrowing or lending. Bottom line that yes some people will lose some money (and a few make a lot of money) but the likelihood of a GFC style uber-crash is low.
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Not much to disagree with there. As noted by Becker one effect of subsidising the price of fuel is to encourage people to over-consume it by buying larger cars and under-investing in more efficient transportation options (public transport etc.) This has the result that weaning people off of cheap fuel becomes very difficult indeed as it take years for the car fleet to turn-over in response to higher fuel costs and years more for planners to divert resources away from road construction. Public transport is, as a rule, more efficient in higher density cities and this cannot happen over-night. All of this adds up to one big political headache, but one that someone will have to suffer sooner or later.
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Posner and Becker are probably right and the chance for even the minimum requirement of a national registry of firearms keeping track of them from manufacture (or import) to destruction (or export) is gone. In the circumstances the best the US can do is harm minimisation and the suggestions they make are probably the best that can be expected in the circumstances. One issue that they did not take up, was that of the external costs to other countries (especially Mexico) of the US inability to curb firearm ownership. Strict laws against arms smuggling, strictly enforced would be welcomed by the rest of us.
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Sorry for the late post. Been on holidays. Posner's suggestion that public accounting needs to be improved has considerable merit in my opinion. It has almost become a fetish here in Australia that all deficits at any time are bad and ought to be gotten rid of no matter what. The result of this attitude and the use of -what is essentially- cash accounting is that infrastructure spending in years of surplus is restricted, as assets expected to last for decades are required to be paid for with cash. A government ought to be able to purchase a fleet of fighter jets with an expected life span of 20 years financing 80% of the purchase price with 15 year debt and still be considered to be in surplus if current receipts exceed current expenditure. As it is, using lemonade stand accounting, it is considered to be in deficit. Finally turning to Jack's discussion of California. Taxes must fall on one of three factors of production: labour, capital or land. Capital is very mobile and hard to reach even for national governments leading to its preferential tax treatment everywhere. Labour is becoming more mobile which leaves land. Land is everywhere the preferred factor for sub-national units such as states and cities because taxes on land are nearly impossible to avoid. Land owners depend upon state based title systems to certify their ownership and this dependency lives them open to taxation. Through Proposition 13, California cut itself off at the knees in respect of land taxation living it labour and capital as its only sources of revenue. Good luck being a sub-national taxing these factors in the internet age. It is hard enough as a national entity. The solution for us in Australia was to impose a VAT at a national level and distribute the proceeds (less cost of collection) to the states (you don't want to be there when the pie is divided up). This seems to be working.
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Although only tangentially related to this post, the issue of defined benefit versus defined contribution pension plans deserves more considered attention than it has hitherto received. The story is usually presented as one of political and economic muscle: unions forcing government and large company employers to provide defined benefit plans (pension depends upon final salary regardless of investment or economy performance) even though defined contribution plans (pension depends on contribution plus the performance of investment of those contributions)are more sound on an economic basis. The movement away from defined benefit to defined contribution plans is therefore portrayed (as it has been by Becker) as progress. I am not so sure. An argument can be made that in fact in many situations defined benefit is more efficient so long as all of the benefits provided are properly priced and paid for. The movement to defined contribution could in fact be setting up the next crisis. The main difference between defined benefit and defined contribution plans is that of who carries the risk that the plan will run out of money (credit risk) and the risk that financial markets will not provide sufficient returns to provide for a reasonable standard of retirement (investment risk). The employer carries these risks in defined benefit plans while the employee (and retiree) carries them in defined contribution plans. At issue is which party (employer or retiree) is better able to carry and manage the risk? I think that a respectable argument can be made that the employer, at least where it is a large company or government, is better able to carry and manage these risks than the people who work for them. These risks require a lot of information and expertise to manage. I suggest that it is asking too much of non-professionals that they manage such risks. Investment professional have trouble enough with these risks as the GFC has demonstrated. Also retirees are much more vulnerable to investment losses than the rest of the population because they have far less time and practically no options to make them up. To ask of them that they investigate credit risk and investment options and suffer the results if they are wrong is unrealistic for almost all people. When you add to ordinary investment risk "uncertainty" the unpredictable 'fat tail' rare but high impact events (such as the recent GFC) to the equation the issue becomes stark but not easy: on the one hand pensioners cannot be expected to provide for such events, indeed how does anyone provide for such events? On the other, is what company or government can afford to provide for such events for hundreds of thousands or millions of employees or ex-employees? These are the issues we will confront sooner or later in a world of defined contribution pensions. Given that these are the wave of the future, we ought to confront these issues now.
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I think that you are being a little hard on the Fed and Ben Bernanke in this post. While Posner is correct to say that the real answers are to be found in Congress and the Treasury at present there is no will on anyone's part to discuss the problem otherwise than in ideological terms or to make the compromises necessary to start fixing the problem. In the meantime QE might buy some time. I should not worry over much about the Chinese. They are busy constructing petards upon which they hoist themselves while loudly hollering that everyone else ought to fix the problems they create for themselves. If a big economy maintains a 10 percent plus growth rate year in - year out the price of commodities will explode. The Chinese blame producer cartels. The Chinese maintain a fixed exchange rate versus the dollar. Consequently they must buy dollars and watch them lose value. They will gnash their teeth but for the time being will have to put up with it as the only alternative is to float the yuan. As for inflation: US unemployment is how high? How many foreclosed houses are currently on the market and how many more are in the for sale queue once those are gone? Inflation? Don't make me laugh. The potential loss of status of the US dollar as the reserve currency is a genuine worry as it is only that status(which forces the Chinese and others to buy it) that is keeping the US afloat in this crisis. Luckily the only other candidate for reserve currency status is the Euro and the Europeans are sufficiently feckless that reserve currency buyers aren't rushing to trade their US Dollars for Drachmarks. Yes QE eases the pressure on politicians to come up with a fix but it is too much to ask of a public servant that he deliberately bring on a crisis in the hope that this will bring on a solution even at horrendous cost. If politicians are sitting back and letting the Fed try to do the job, the blame rests with the politicians, those who elect them and those who are supposed to be keeping the electorate informed and not with the Fed. The US is currently borrowing money to pay interest on past debts. Soon it will have to borrow money to pay the interest on the money borrowed to pay the interest et cetera et cetera, ad infinitem until bankruptcy. The problems will not be fixed without a substantial amount of pain that will have to be spread as evenly as circumstances permit. Who is to blame is only interesting to the extent that it points to future reform. Until the politicians come to this point and start talking to one another like adults, everyone else including the Fed will have to try to keep things together as best as they can.
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The remarks written by Rick above are interesting on a number of levels. First of all it should be obvious that an economy has to be managed over the whole cycle and not just in recession yet, perhaps because of the extreme situation the US finds itself economic foresight does not extend beyond the end of the year. Next the lack of vituperation should be noted. The Labour government was not criticized because for being "left wing" or "socialist" but for its profligacy. Posner rightly says that the British system of government is more centralised than that of the US which is true. However because the governing Conservatives do not have a majority in Parliament they can be tossed out at anytime which makes their program a remarkable success at consensus building. I look forward to seeing what, if anything, the UK does about the financial services monster it created.
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This is a very good post because it recognises that the answers to the fiscal question will need to be found on both sides of the tax and spend equation and not on one side alone. The U.S. government has far more economic capacity than Italty and Spain and ought to be at far less risk of default. Its biggest risk lies in the hollowing out of the political centre leading to political paralysis as sensible compromise is characterised (bastardised) as betrayal or worse. This leads to the result that nothing substantial can be done to remedy the problem until the edge of crisis is reached and the US is close to default
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It would be nice to be able to say that all you have to do is push this, pull that, and twist the other and your problem will be over and then to denounce as silly and/or interested any unable to see the obvious wisdom of these solutions. I don't think that it will be all that easy for the US because of the factor identified by Posner: excessive debts have not been worked off only disguised. Many borrowers are still under water on their mortgages which means that many banks are underwater also even if they have not recognised it. Instead US banks are borrowing from the Fed at zero and lending to the US government at 2% effectively making money from nothing and so repairing their balance sheets. Small wonder there is nothing left for small business. Until they have balanced their losses with arbitrage profits banks won't get back into the business of lending money to people who want to spend it or invest it. The US is in diabolical trouble now because it used its borrowing capacity, both private, business (any one remember "lazy balance sheets") and government, in the period prior to the the GFC when borrowers least needed to borrow. Now would be a good time to borrow against previous austerity but there is none. Now the US is faced with either paying off previous debts to in order to lay the ground work of future prosperity at the cost of contraction of consumption and therefore production today or maintaining or increasing debt which probably will only result in the postponement of the inevitable showdown. Who is going to get it in the neck\; those who borrow or those who lend?
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The most striking difference between countries such as Germany, Canada and Australia that more or less sailed through the recession and the US, UK, and the PIIGs that didn't, is that during times of prosperity the former paid off debt while the latter incurred more of it. Worse than incurring debt, is having nothing lasting to show for it. Now that we are in a recession and borrowing capacity is needed/useful, it is almost entirely absent. Becker and Posner ascribe continuing unemployment to "uncertainty" and anti-business regulation. Might I suggest that a better reason maybe that the customers of a domestically oriented business economy are still crawling out of debt and simply have no money to spend. Stimulus might have been useful as a bridge between the time of the crash and the recommencement of genuine economic activity as it was in Germany etc. but it is no substitute for genuine economic activity as stimulus has to end sooner or later. Genuine economic activity will not recommence until losses have been realised and funded (not hidden) and the balance sheet of business and households has been strengthened. It is this strength that will lead to confidence. I suspect that a lengthy process of readjustment lies ahead for the US and much of Europe before prosperity for those countries can resume. It will not start until the real problems are confronted and not avoided.
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I agree with those who denounce this post for its superficial analysis of the reason the US risks a double dip recession. It is not a question of Obama having "stirred up" public anger: clearly he is responding to public anger. To the extent that anyone can be said to have stirred things up the you should look to the usual suspects in the tabloid TV business who insist that the President "do something" and "be strong" in circumstances in which their is little for the President (and government) to do and strength is not called for. Likewise much of the the ill considered parts of the financial regulation are equally a response partially on the part of Congress to "do something" and "stand up to Wall Street". Rather than denouncing this or that political actor or action, Posner should be criticizing the abysmal quality of public debate today.
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Regarding what Brian Dolby had to say about credit card fees, in Australia the central bank (the Reserve Bank of Australia) has regulatory responsibility for the payments system (though not for the prudential regulation of banks). Some years ago the RBA noticed that the more costly payment system -credit cards- were being used in preference to the cheaper system: debit cards. This was a result of banks enticing credit card use with rewards programs while merchants were contractually unable to pass on merchant fees they were charged for credit card use. To correct this anomaly the RBA made a rule prohibiting credit card companies from insisting that merchants not charge extra to credit card use. The result has been that some, not all, merchants (and all taxi cabs) charge for credit card use: usually a modest fee. Airlines and movie houses charge outrageous fees for credit card use on internet sales. In fact for Australian airlines, the accounting dept. has become a major profit centre. Supposedly you can use debit card feature to avoid these fees (this is a legal requirement) but the obstacles are so many that most don't even try. I believe that some large chains were able to re-negotiate their merchant fees but these deals (if they exist) are kept commercial in confidence. All in all it is difficult to discover if this reform has brought about the desired outcome -more debit card use - or not though the RBA has ceased to sound off about the topic which may mean something.
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Genuine reform would look like this: 1. A single prudential regulator for deposit-taking institutions. The number of agencies in the US that have a piece of prudential regulation of financial institutions is bewildering. Numerous regulators risks regulatory arbitrage and lacks transparency and accountability. 2. The brief of the prudential regulator to be solely prudential regulation. International competitiveness of financial institutions is not to be considered. The UK Financial Services Agency was directed to consider the competitiveness of its regulations internationally resulting in the deliberate slackening of capital standards and disaster for the UK. The treatment of trust-preferred as capital mentioned by Becker, was brought about in order to give banks the advantage of cheap "capital". It's cheap because it is bogus. 3. Get rid of Freddie and Fannie. They were supposed to manage mortgage default risk in the system. Instead they concentrated it. Most free market economies with widespread home ownership get by just fine without a semi-government agency to re-finance home mortgages. It is absurd to suggest that the US, of all places, needs such a thing. For Posner to say that it is not the bank's fault that they took on too much risk because the regulator was asleep at the switch is rather disgusting. It is as if a thief were to say that its thieving was society's fault for not having enough police. The banks and other financial institutions have to take primary blame for the crisis. For one thing they were as much a part of the de-regulation craze as anyone. When the banks lobby Congress for MORE regulation you can blame the regulators to the exclusion of industry. Finally Lehman Bros. had the opportunity to be rescued (by being sold to a Korean Bank) but turned it down. Against stupidity like this the Gods themselves act in vain.
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Perhaps a cut in entitlements may be the political price that liberals will have to pay to get the tax increases that are also needed from the conservatives. Are politician wiling to horse trade in this manner any more or is the ideological divide unbridgeable? If so it will need another crisis worse than the last one, before politics permit sensible solutions.
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My concern is that here is a perfectly good crisis for Europe and they will miss out on taking advantage of it vide the Japanese. In Oz we had our crisis in the early nineties. Eighteen months of economic shrinkage or nil growth, the near collapse of two major banks (out of four we have in total) and stratospheric unemployment. The result was that antiquated corporate regulation (both the laws and the institutions that enforce them) were brought up to date as was banking regulation (laws and institutions though the institutions needed another 10 years and the collapse of an insurance company to the learn that laws don't enforce themselves and "light touch" is no touch. The central bank, which played a role in that recession, was given independence of a sort in that it was told to seek an inflation target of 3% per annum. Likewise Asian countries such as Indonesia and Korea used the Asian crisis to reform their banks, free their currencies and (begining in the case of Indonesia) to get rid of patronage networks. Korea is now a market economy with the bubble wrap off. Its economy almost has a "new car" smell. Indonesia is still a work in progress. It has recognised that corruption has to go but that the transition will be difficult until the government is in a position to pay public servants a decent wage. In terms of crisis Indonesia is a text book case of not letting one go to waste. When the tsunami hit Aceh ("ACHAY") province in December 2004 (and it hit harder there than anywhere else) Indonesia recognised a crisis that could be an opportuntiy. Aceh had an on-going insurgency against the government) during this period that absorbed both resources and the attention of the government trying to suppress it. The Indonesian government acted to ensure that foreign aid (including from the US Marine Corps) got to where it was needed and was not used to support patronage networks that plague that country. The eventual result was that it was able to come to an agreement to end the insurgency, which seems to have held. The point is that crises can be good. They draw attention to what is wrong in a society and give a society the incentive to fix the problems as soon as possible. Thing is, that the urgency of a crisis is easily dissipated (vide Japan again) and what needs to be done has to await losers consenting to it. I regret that this will be lost in the European crisis and that they will not do the necessary. For one thing the IMF is being kept at arm's length. I don't carry a torch for the IMF but they are useful as an external target for rage that might be directed internally and sometimes as a means of pointing out the obvious. (Not always. They directed the Indonesian government to cut spending even though their crisis was a banking and corruption crisis and the Indonesian budget was in balance). There are obvious problems with Europe that have been revealed by this crisis. Unfortunately it seems that no one has considered these problems in any detail before the crisis. There is no agenda that has been created that has recognised the problems of Europe and has proposed steps to resolve them prior to the crisis taking place. What this means is that Europe may be able to temporise and postpone, at least for a while, as Japan did with economic stagnation as a result.
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These days central bank independence of a greater or lesser degree is almost taken for granted. More controversial is the issue of whether the central bank should only seek to manage consumer price inflation, asset price inflation or both. Also should it wait for inflation to take hold or should it act when it anticipates that inflation will happen if it fails to act? Alan Greenspan continues to maintain that a central banker can only act against rises in the CPI after they take place. The Reserve Bank of Australia has raised interest rates to counter what it thought were asset price bubbles even when inflation was within its 3% per annum target. (This target is set by agreement between the Treasurer, a cabinet appointment, and the RBA head). I wold suggest that the RBA practice is the better. When it does this it cops considerable criticism from politicians trying to distance themselves from the consequences for their constituents. Ideally the rise and fall of interest rates would be looked upon in political terms as a natural phenomenon like the rise and fall of temperatures and therefore mostly out of the control of the political process. I do not see this happening anytime soon so central bankers will continue to have to account for themselves to politicians as the quid pro quo for their de facto independence.
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