March 12, 2016

Tim Harford, what about taxing the sin of excessive risk aversion instead of subsidizing it?

Sir, I refer to Tim Harford’s “These are the sins we should be taxing” March 12.

Mark Twain supposedly said: “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.” And we used to mock or even abhor the risk aversion there implicit.

But then came regulators and with their risk weighted capital requirements; which allowed banks to leverage more the equity with the safe than with the risky; which allowed banks to earn higher expected risk adjusted returns on equity with the safe than with the risky; which was a de facto tax on risk taking and a de facto subsidy of risk aversion; they made it absolutely certain that Mark Twain was more correct than ever.

And that is indeed socially harmful. Not only does it block the access of “the risky” to bank credit, the SMEs and entrepreneurs, something that causes both more inequality and lesser economic sturdy growth.

But in order for this truth to sink in, so as to do something about it, we need that persons like the Undercover Economist understand the difference between the possible short-term costs of risk taking, and the truly high and certain long-term costs of risk aversion.

Just because something is perceived risky does not mean it is risky, sometimes it means, ex post, that it is quite safe. Make sure you really know what is what in risk and sins, before you tax it. ​Know your base rate J

@PerKurowski ©