Tuesday, February 28, 2012

The Return of Confiscatory Taxes

Every economic crisis feeds populism. And one of the most immoral and violent populist electoral tools is the imposition of confiscatory taxes. Socialist presidential candidate François Hollande thinks that receiving a majority of valid votes gives him the right to decide how to spend 75% other people's fortunes:
SOCIALIST presidential candidate François Hollande says he would introduce a top tax band of 75% for incomes of more than e1 million a year. ...

Hollande added: "How can we accept that? It's not possible to have this level of remuneration" he favoured a "simple rule: income from capital should be taxed like the income from work".

The 75% tax rate would be the top band, with an additional slice of 45% on incomes above e150,000 a year.

Friday, February 10, 2012

Switzerland Shows the Way

At least when it comes to government budgetary decisions, direct (plebiscitary) democracy may be the best choice, according to Funk and Gathmann:
The current debt crisis in Europe and North America raises the question of how to impose spending discipline on governments and politicians. A country with historically low government spending is Switzerland, which many argue is related to the high use of direct democracy. Direct democracy is also prevalent in other countries such as the United States, where more than two thirds of the population lives in a state or city with a popular initiative. Comparing data on postwar spending in states with more or less direct democracy, the empirical evidence points to a strong negative correlation between a region’s spending level and the existence of direct democracy in both the United States and Switzerland (Feld and Matsusaka 2003, Matsusaka 2004).

Taleb and the Ketchup Bottle

Taleb on The Spectator. Perfect, so no further comments:
The basis of Sir Mervyn King’s plan for printing money on this scale is that the effects of QE can be carefully controlled. But this, says Taleb, is the biggest mistake of all. ‘It’s like a ketchup bottle. You try to pour money out of the ketchup bottle: nothing comes out, nothing comes out — and then everything splashes. This is how it works. Inflation doesn’t arrive in a nice, manageable way, so don’t mess with it. Every single person who has tried QE, or a form of printing money, has effectively lost the argument. Turkey had it, Brazil had it, Argentina had it, Italy had it when they debased the lira. Even Weimar Germany claimed that QE made the government rich. There’s always an argument to print money.’

Wednesday, February 8, 2012

The Economic Irrelevance of a Single International Language

One superficial and misguided statement that you routinely hear in large monolingual countries such as the US and Brazil is that a common language is an almost necessary condition for economic progress. The idea will usually be presented attached to silly examples such as "look at poor India, they have to deal with so many languages, for sure it's one of the main reasons why they are so poor," or "look at the European Union, such a political mess, they speak too many languages."

My reaction is always to point out that one of the most developed nations in the world, according to any standard of choice, Switzerland, is a small country with four official languages. Most rich nations are found in Europe despite its Babelic network of languages. And you can find many examples of large but mostly monolingual nations and regions such as Brazil that didn't do nearly as well as their Babelic peers.

Victor Ginsburgh presents the point scientifically in this interesting article and uses the opportunity to make fun of a recent demonstration by Harvard's Larry Summers of typical monoglotic arrogance:
In 2005, Larry Summers, then President of Harvard University, outraged 50% of the world by claiming that women are not as talented as men in science and mathematics. This time, he has outraged some 94% of the world’s population by suggesting that native speakers of English should forego learning other languages since, anyway, the rest of the world will soon become fluent in English (Summers 2012). ... However, and interestingly enough, Melitz ... shows that English as an OCC is no more effective than other European languages in promoting trade.

Thursday, February 2, 2012

Not What Keynes Had in Mind

Keynes didn't consider the concept of liquidity trap to be too relevant in practice. He knew that, in the case of near-zero interest rates, the speculative demand for money would be infinite, the demand for bonds would be null, and borrowing would increase, so interest rates would probably rise and take the economy out of the trap (a good summary of this point is provided in Handa's Monetary Economics).

And this is exactly what happened during the early stages of the current financial crisis. People who believe that the US found itself in a liquidity trap should at least acknowledge that this was the artificial creation of a central bank subservient to a prodigal treasury operating in a financially repressed economy.

Keynes was worried about the hypothetical lack of autonomous demand and how "benign" government debt could be used to compensate for it. Chronic overindebtedness, financial deleveraging and repression, and a central bank that enjoys the role of quasi-fiscal authority were not among his most well-known theoretical concerns.