December 08, 2016

For tax cuts to work, regulations that distort the allocation of bank credit to real economy must first be removed

Sir, I refer to Chris Giles interview of Arthur Laffer “Reagan’s tax guru predicts US nirvana” December 8

Let me be brief. Reagan ended his presidency on January 20, 1989. The Basel Accord, with its risk weighted capital requirements, was approved in 1988 but entered into real effect in 1992. Basel II, with its even more distortionary risk weighting is dated June 2004.

I don’t want to rain on anyone’s parade but, whether it is by tax cuts, fiscal deficits, QEs, low interest rates, or by any other thinkable stimulus, for these to work their way entirely into the real economy, the distortions in the allocation of bank credit must be removed.

Sir, as is, tax cuts will not produce what Laffer and other expect, and so resulting public deficits would increase dangerously the levels of public debt.

PS. Let me also invoking the spirit of Charlton Heston in Planet of the Apes: “Keep your stinking monkey paws off our banks, you dirty regulatory ape.