Restoring healthy economic growth requires, sine qua non, getting rid of the distortions in the allocation of bank credit.

Restoring healthy economic growth requires, sine qua non, getting rid of the distortions in the allocation of bank credit.Sir, Martin Wolf writes: “we are missing a profound transformation in how macroeconomic stabilisation will have to be conducted. Whether we like it or not, we must rely on active fiscal policy.” “Restoring growth is more urgent than cutting public debt” December 14.

Of course, we need active fiscal policy, but what about the private sector? E.g. we must be able to rely on effective allocation of bank credit. And that, because of the risk weighted bank capital requirements, is simply not happening. Two examples: 

Much lower bank capital requirements when lending to the government than when lending to citizens, de facto implies bureaucrats/politicians know better what to do with credit they are not personally responsible for than e.g. entrepreneurs. And unless we are communist, or in love with taking decisions with other people’s money, we know that’s not true.

Banks are also allowed to leverage their equity much more with residential mortgages than with loans to small businesses/entrepreneurs, those who create the jobs that helps service mortgages and pay utilities. That favors the increase of house prices and weakens the economy. Insane!

Wolf argues: “It is essential to lock in low interest rates. The maturity of UK public debt has always been relatively long. The aim now should be to make it as long as possible, by taking advantage of exceptional borrowing conditions.”

But, those “exceptional borrowing conditions” are artificial. What would the free market rate on UK public debt in absence of QEs and the low bank capital requirements mentioned? And is not the difference between that rate and current ultra-low interests, de facto, not a well camouflaged tax, retained before the holders of those debts could earn it?

We all, Martin Wolf included, should be able to have confidence in that our banks are regulated by sensible and competent people. For a starter that requires regulators understanding that those excessive exposures that could be dangerous to our bank systems, are always built up with assets perceived as safe, never ever with assets perceived as risky.

Sir, July 12 2012, Wolf wrote that when "setting bank equity requirements, it is essential to recognise that so-called “risk-weighted” assets can and will be gamed by both banks and regulators. As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk." 

Seemingly he still does not ​really ​understand what I meant.

My 2019 letter to the Financial Stability Board

@PerKurowski

Should the tax on robots be high or low?

Sir, John Thornhill writes that Carl Benedikt Frey’s “The Technology Trap” informs us that “the number of robots in the US increased by 50 per cent between 2008 and 2016, each of them replacing about 3.3 jobs” “The return of the Luddites” July 13, 2019.

Those who are so replaced must surely have been generating some non-wage labour costs, like social security, that robots don’t. Therefore I frequently pose a question that, with the exception of some Swedes, no one wants to give me a definite answer to. It is:

Should we tax robots low so they work for us humans, or high so that we humans remain competitive for the jobs?

In an Op-Ed from 2014 titled “We need decent and worthy unemployments” I wrote: “The power of a nation, and the productivity of its economy, which so far has depended primarily on the quality of its employees may, in the future, also depend on the quality of its unemployed, as a minimum in the sense of these not interrupting those working.”

And over the years I have become convinced that in a universal basic income, large enough to help us out of bed to reach up to what is available, and low enough to keep us from staying in bed, lies our best chances to find the basic social stability we need to avoid societal breakdown,.

The financing of that UBI could include that those who exploit data on us citizens shared with us part of their ad revenues, a high carbon tax, and perhaps taxing robots and AI (though I do not know with how much)

PS. I case you wonder why some Swedes answered the question that has primarily to do with the existence in Swedish of the magical word “lagom”, meaning something like not too much not too little but just right. J

https://perkurowski.blogspot.com/2017/02/here-some-disorderly-lose-cannon.html

@PerKurowski

The 2008 crisis had little or nothing to do with a tax bias in favour of debt finance

Sir, Martin Wolf discussing a system where for tax purposes “no deduction would be allowed for financial costs” writes “there would no longer be today’s bias in favour of debt finance, which creates significant risks to economic stability, as the financial crisis demonstrated.”“The world needs to change the way it taxes companies”

One could sure argue there should not be a bias in favour of debt finance, and that it has had an important role in creating excessive corporate debt, but to argue that it caused the financial crisis is clearly wrong.

Does Mr Wolf really think that all those in the subprime sector who bought houses on credit, and whose mortgages got packaged into ex ante AAA rated securities, which ex post turned out not to be AAA securities, and which set off the 2008 crisis, did so because of tax considerations?

And does Mr Wolf think that the reason banks held so little capital against these securities was that the dividends they were to pay were not tax deductible? Was it not that the US investment banks and the European banks were allowed to hold these AAA rated securities against only 1.6% capital?

@PerKurowski

Here are some actions we should take in order to reduce the threat inequality poses to our democracies.

Sir, the discussions about growing inequality, that tend too often to concentrate on either income or wealth inequality expressed solely as a linear function of monetary terms, are dangerously simplified. Once some basic and non-basic wants have been met, loading up some extra millions does not produce the same amount of marginal benefits per dollar.

But of course for those who do not have the income to satisfy their needs and basic wants inequality matters, a lot. And so more important than worrying about inequality, is to worry about how increase the incomes of those earning less. 

Sometimes the lower incomes for some can have to do with some few other earning unjustifiably or even incorrectly too much, but most often it has little to do with that.

But the redistribution profiteers want to hear nothing of that sort. They prefer to feed envy, with for instance their so frequent mentions of how few wealthy posses more wealth than a billion or so of the poor. That of course can only increase the threat inequality signifies to our democracies that Martin Wolf lays out well in his “Inequality is a threat to our democracies” December 20.

Going from “a stable plutocracy, which manages to keep the mass of the people divided and docile” to the “emergence of a dictator, who rides to power on the back of a faux opposition to just such elites” is what sadly happened in my Venezuela.

What can we do?

When Wolf writes “The market value of the work of relatively unskilled people in high-income countries seems very unlikely to rise” we could for instance see what role risk weighted capital requirements for banks play:

In terms of equality what’s the difference between someone owning a home and someone renting a similar one?

Not much, that is unless the value of the house owned increased a lot and, as a consequence, rents also increase, sometimes more than what the renter can compensate with increased salaries.

That’s what happens when banks are allowed to hold residential mortgages against much less capital than when for instance lending to entrepreneurs; and as a consequence earn higher risk adjusted returns on equity with mortgages than when financing entrepreneurs; which mean banks will make the financing of house purchase abnormally available; which means house prices will go up… until

That is also what happens when central banks inject liquidity that benefits mainly the owner of assets; “now your house is worth more so take out a new loan against it” is not an offer that one renting will hear. 

When Wolf refers to “a desire to enjoy some degree of social harmony and the material abundance of modern economies, [being a] reasons to believe the wealthy might be prepared to share their abundance.” We should be careful of promising more than what could be obtained, because much of that abundance is not easily converted into effective purchase power or transferable income to others; for instance when some wealthy, by means of what could classify as a voluntary tax, decides to freeze on a wall, or in a storage room $450m of his purchase power, in a Leonardo Da Vinci “Salvator Mundi” how do you efficiently reverse that? Of course what’s important here is not the buyer’s paid $450 million but to where the $450million received are going.

Sir, I believe the following actions would go a long way to “ensure the survival of liberal democracy”

1. Getting rid of the distortions produced by bank regulations

2. A monthly Universal Basic Income (UBI) that is sufficient to help you get out of bed but not so large as to permit you to stay in bed. 

3. A Revenue Neutral Carbon Tax that helps fund the UBI and aligns the incentives for saving the environment and reducing inequality. 

4. A special tax on profits obtained under the cover of intellectual property rights to help fund the UBI.

5. Have Facebook, Google and alike pay a minimum fee into the UBI fund for any advertising that they send to us on the web. That would also help us to make sure they do not waste so much of our very scarce attention span.

@PerKurowski

Profits obtained under cover of patents should be taxed higher than those obtained when competing in the nude

Sir, Rana Foroohar writes about the clear ‘you can’t have the cookie and eat it too’ conflicts present in the area of protection of intellectual rights. “A better patent system will spur innovation” September 4.

In 2008, trying to build a bridge that could resolve some issues, I ended an Op-Ed with a proposal of introducing a special tax on all profits generated under the cover of any IPR, for instance a patent.

As I have since repeated many times, it is not logical the same tax rate applies to profits obtained when competing naked in the market, than when the profits are obtained under the cover of a protection.

Such tax should, as a minimum minimorum, at least cover all costs for society of awarding and enforcing IPR protections.

Nowadays I would also argue that tax should also be a source of funding for a Universal Basic Income. That because, most or even all of these protections, truth be told, are sort of unfairly awarded to whoever runs the last leg of a relay that has been run, with ingenuity, creativity and strenuous efforts, by generations of humans.

@PerKurowski

What causes more inequality, or feelings of poverty, some CEOs’ obscene high salaries, or some prices, like those of Viagra?

Sir, I refer to David Crow’s “Cost of Viagra increases 27% as Pfizer raises US drug prices” June 3.

I have no idea why but my doctor has ordered me a different brand, so I am not a user of Viagra. That said it was astonishing to read that one single Viagra pill is now $73.85. That price must surely only be possible because of the official protection of intellectual property rights.

There should be a difference between the protections of a pharmaceutical industry, so that it can afford develop new medicines, and the protection of an extortion racket. As is, 10 Viagra pills would, at this price, represent a fairly decent monthly Universal Basic Income.

In a world in which so many prices are going down-down-down, among others because of automation and robots, can we afford to impact this way those who have to earn less and less and less income, or stay more at home, only because of automation and robots?

Perhaps Trump, instead of thinking of building up Mexican walls, should be thinking about tearing down some intellectual property protection walls. Open ended ones, like those that allowed “Martin Shkreli to raise the price of an Aids medicine from $13.50 to $750 a pill, reflects very badly on the state and governance of our society.

About a decade ago I wrote an Op-Ed in which I held that it was not logical that profits earned by means of protected intellectual property, were taxed at the same rate than those profits obtained from competing naked in the market. That argument is still valid, especially if those extra tax revenues become tax neutral, by feeding monthly UBIs.

PS. In the same vein, now we perhaps have to add a proposal on that profits generated with the use of robots, should be taxed higher than profits generated with the help of humans.

PS. Some years ago a friend, wanting to launch little-known-me as a candidate for the presidency of Venezuela, what a "friend", suggested a populist campaign based mostly on “Free Viagra for everyone”. He argued that would have more impact that my promises of sharing out all net oil revenues directly to all Venezuelans. He might have a point.

@PerKurowski

A tax on robots or similar substitutes for humans, and a Universal Basic Income, solves many of the challenges of automation.

Sir, Guy Wroble writes: “As automation will target more expensive labour first, aside from a limited number of tech jobs to service the machines, humanity would appear to be on the road to becoming the hewers of wood and the haulers of water. Jobs which pay so little that it makes no sense to automate them. “Automation may lead to humans hewing wood” January 17.

Indeed that could happen, if we do not do anything about it. But we can! Tax all what substitutes for human jobs, and have those tax revenues help fund a Universal Basic Income payable to all.

That way we would not only level the field for humans to compete with robots and similar, but we would also make sure humans do not have to offer themselves to perform the chores that robots are most suited to do.

@PerKurowski

Has ECB and Draghi read Piketty and now want to impose a wealth tax on Europe’s piggy-banks?

Sir, Claire Jones reports Mario Draghi said that the ECB would “do what we must to raise inflation and inflation expectations as fast as possible, “Dovish Draghi raises hopes for more ECB stimulus” November 22.

And since the ECB is aiming at 2 percent inflation that would be equivalent to a 2 percent wealth tax on all the piggy-banks in Europe. Has ECB and Draghi understood Piketty a bit too much?

Frankly, in a Europe with such problems like that banks are effectively restrained by crazy regulators from lending to medium and small businesses, entrepreneurs and start-ups, those tough risky risk-takers that Europe so urgently need to get going, to then hear all this talk about inflation as an overriding minimal requisite for a solution, should make all a bit nervous… specially the poor (and the piggy-banks) who always end being those most taxed by inflation.

Indeed... why not a tax on too-big-to-fail-banks?

Sir, I refer to James Politi’s and Gina Chon’s “Big banks pledge to fight tax on assets” February 26.

In May 2003, more than a decade ago, as an Executive Director of the World Bank (2002-2004), below is what I told some hundred bank regulators gathered at the World Bank for a Risk Management Workshop.

“There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.

Therefore a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.

Knowing that “the larger they are, the harder they fall,” if I were regulator, I would be thinking about a progressive tax on size. But, then again, I am not a regulator, I am just a developer.”

And while you're at it, Mr. Dave Camp, US Congress, House Ways and Means Commitee, look into this too

Tax heavens are always the best antidote to tax havens… and governments should earn our taxes

Sir, I commend you for in “Taxing wealth”, August 30, daring to recognize “there is a case for shifting burden from activity to asset”. And I would agree! 

I assume though that you suppose those taxes on wealth would act as a more transparent tax substituting for how financial repression, with its negative real returns on government debt, seems currently intend to tax wealth. True? Because, if you are thinking in terms of an additional tax, then I guess, many would start searching urgently for a tax-haven.

And, of course, governments should earn our taxes!

Mark to market the government’s bail-out efforts

Sir Jonathan Guthrie in reference to the bailout of General Motors writes that if he was a US taxpayer “I would tell Fritz that I wanted my $50bn back”, “An industry running on romance alone” July 23. And he is fully in his right to demand that… but only after he had paid his share of the tax of course.

Perhaps what the US should do is to turn around and give a 50% tax credit for anyone willing to pay 100% of face value for whatever the government has received from GM in return for that assistance and then let these papers trade to see what the market considers them to be worth.

Problem though is that government would never dare themselves to be marked to market that way.

The sincerity of the authorities matter more than their commitment to stability.

Sir Martin Wolf in “Credibility is key to policy success” April 3, writes that “a central bank’s unconventional monetary operations are reversible” but says little on the issue that the distributional effects for the citizens of such operations are most probably not reversible at all.

At this moment for many private persons and entities any “quantitative easing” dilutes effectively the current value of their cash, with no guarantee of reversal, making it thereby a very non-transparent tax, and so countermeasures will be taken by the market, for sure.

Keeping up any government’s credibility while it plays hidden games under the table is not an easy trick, for any magician. This is not so much about the “sincerity of the authorities’ commitment to stability” as it is about authorities’ general sincerity.

The worst part though might be that “quantitative easing” makes it also difficult for the government to be sincere with itself as it really does know what the market would look like in the absence of such easing, just like a company cannot be really sure of the price of their shares during a stock-repurchase plan.

The value of our cash is diluted in an ocean of cash, which effectively makes of “quantitative easing” just another tax.

Sir, Krishna Guha in “Easing by world’s central banks take a variety of forms” April 2, mentions that “Expanding the money supply creates relatively little inflation risk in the short term. But this could change when the crisis turns.”

The above is right of course but, let us not forget that however we dress it up “easing” signifies an easing only for those whose instruments are being bought, whether it is the government or the holders of the distressed securities. For the rest of us it just signifies that the real value of our cash gets to be diluted in the ocean of cash produced by the “quantitative easing”, which effectively makes it just another tax, though a much less transparent one.

Do not tax the migrants, make them save instead.

Sir, I could not agree more with Philippe Legrain on that Europe (and the US) need urgently to develop some large scale temporary immigration programs if they want to have a fighting chance of keeping what is happening under reasonable control. If the political price to pay for such programs is along the lines that he suggests in “A migrant tax would slash illegal entry into Europe”, April 25, namely an “extra payroll tax on foreign workers” so be it, and only because something is better than nothing. Nevertheless, let us be clear that what he is suggesting is a form of bribery offering all the “true” citizens to share into the earnings produced by the migrants, the secondary citizens. It is also equivalent to a handicap system where you place a special tax on the shoulders of foreigners, so that your homeboys can easier compete, which could have of course some long term debilitating effects for your own.

Much better is a system that looks to really guarantee the temporary aspects of it all. Not only do you have to make certain that the migrants keep up their contacts with their homelands, so as to avoid the risk of any heart-drain but also, that those same homelands manage to get better homes to return to. That you take a percentage of the migrants earnings and place it into a savings account that he will get back when he returns home, sounds much more reasonable than taxing him so that he might remain poor and impeded from returning home.