Professor Summers. Keeping mum on how sovereign public borrowings are currently subsidized is cheating on the future

Sir, Lawrence Summers writes: “Borrowing to pay for tax cuts is a way of deferring, not avoiding, pain. Ultimately the power of compound interest makes even larger tax increases or spending cuts necessary. But in the meantime debt-financed tax cuts raise the trade deficit, and reduce investment thereby cheating the future.” “A Republican tax plan that would help the rich and harm growth” November 6.

Sir, Prof Summers is entirely correct in that “Borrowing to pay for tax cuts is a way of deferring, not avoiding, pain”. But, one major reason for why such borrowing can occur is that it is currently contracted at artificially low rates.

With the regulatory subsidy imbedded in the capital requirements for banks’ 0% risk weighting of sovereign debt; and with the stimuli provided by the Fed with its low interest policy and huge quantitative easing programs, America’s current government’s borrowing costs do not reflect the real undistorted rates.

Without these non-transparent help from their statist colleagues, there is no doubt the interest rates would be higher, the current fiscal deficit higher, and the adjustments needed much clearer.

Sir, since Professor Summers has been consistently ignoring this, he is willing or unwittingly helping to cheat the future too.

@PerKurowski

Because of distortive bank regulations, current tax cuts will deliver much less growth than what could be expected.

Sir, I refer to George Magnus’ “New regime’s growth pledge poses challenge for the US central bank” December 14.

In it, like many other commentators, Magnus draws comparisons between current Trump/Steven Mnuchin economic plans, with the lowering of taxes, and the Reagan years. He find several differences, though again like most or perhaps all commentators, he ignores the fact that during Reagan years, there was no such thing as risk weighted capital requirements for banks that distorted the allocation of credit.

That regulation stops us from getting the most bang out for any stimulus, be it tax cuts, QEs, fiscal deficits, low interest rates, etc.

If adjusted for it, the Committee for a Responsible Federal Budget’s already worrying estimates would even seem too optimistic.

What is truly harrowing though, is that those distortions are not even discussed, as if these did not exist, as if these should not be named.

For instance I have been unable for more than a decade to get straight answers from the regulators to some very basic questions, zero contestability; and Sir, FT’s Establishment has also refused to ignore these questions, notwithstanding my soon 2.500 letters to you on “subprime bank regulations”

@PerKurowski

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.

PS. Must one go on a hunger strike to have the Basel Committee on Banking Supervision answer some very basic questions?

@PerKurowski