Current Affairs

Colombia extends its wealth tax

by on September 17, 2014 at 11:03 am in Current Affairs, Economics, Law | Permalink

Colombia is one of the world’s most unequal societies. Last week, the government of Juan Manuel Santos, who began his second term as president in August, announced the extension of a wealth tax introduced in 2002 to pay for the mounting costs of the country’s 50 year drug-fuelled guerrilla war.

“In that sense, we are actually ahead of the curve of what Piketty proposes,” says Mr Cárdenas.

…“This touches only 50,000 Colombians out of the entire population” of 48m people, he says, “that is less than 1 per cent of the population.”

President Santos himself is a product of that 1 per cent. A US-educated economist and member of a wealthy family of the Colombian establishment, he heads up a centrist administration, not a Venezuela-style leftist regime.

Mr Santos has increased rates for various tranches of the levy, in some cases by 50 per cent. Those with a net worth of between $510,000 and $1.5m must pay a 0.4 per cent tax. The rate rises to 2.25 per cent for net worth above $4m. That applies to 45,000 businesses and about 1,000 individuals, Mr Cárdenas said.

Only about five percent of Columbians actually pay into the standard income tax system.  The FT piece by Andres Schipani is here.

Many political unions subsist on creative ambiguity.  That is, if the right question were posed, and the citizenry forced to answer it definitely, political order might spin out of control.

Canada, Belgium, and indeed the entire European Union seem to be organized on this basis.  It’s not quite that everyone thinks they are getting their way, but rather explicit concessions are not demanded for each loss of control embodied in the broader system.  Certain rights are held in reserve, with the expectation that they probably will not be exercised, but they can nonetheless influence the final bargaining equilibrium.

Most international treaties rely on some degree of creative ambiguity, as do most central banks, with their semi-promises of bailouts but “not too much not too certain you know” as the default.  You might like the mandated outcome (or not), but I doubt if it would improve political discourse in the United States to have an explicit thumbs up vs. thumbs down referendum on abortion.

Many partnerships and marriages rely on creative ambiguity too.  Should the Beatles have forced Lennon and McCartney to specify who had the final say over each cut?  That probably would have led to a split in 1968 and there would be no Abbey Road.  Must parties to a marriage specify the entire division of chores and responsibilities in advance?

We find the same in many academic departments.  Things can be going along just fine, but once the department has to write out an explicit plan for future growth and the allocation of slots across different fields or methods, all hell breaks loose.

Question posers and agenda setters have great power.

All praises of democracy must be embedded in a broader understanding that a) formal questions can be destructive, and b) we cannot be allowed to pose questions without limit, at least not questions which require explicit, publicly verifiable, and commonly observed answers.

Once a question is posed very explicitly, and in a manner which requires a clear answer, it is hard to take it off the table.  There is thus an option value to holding these questions in reserve, which means that the expected return from the question has to be pretty high to justify changing the agenda in a hard-to-revoke manner.

I am thus not impressed by claims that a “yes” vote for Scottish independence would represent “the democratic will of the people.”  It might just be a question which should not be asked in such a blatant form.

This article, by the way, argues quite well that the current independence referendum is not really democratic at all.  Who gets to vote, and who not, is quite arbitrary.  Maybe they first should have held a referendum on that?

Here is the latest:

David Cameron faces a “bloodbath” at the hands of Tory MPs after all three parties pledged to continue high levels of funding for Scotland if it rejects independence.

The Prime Minister is facing mounting dissent among English backbenchers after promising that Scotland’s special funding arrangements will continue even when the country is given control over its own taxation and spending.

One Tory MP said the promise to Scottish voters, issued by Mr Cameron, Ed Miliband and Nick Clegg in the Daily Record newspaper, “smacks of desperation”.

Under the Barnett formula, devised in the 1970s by Labour Treasury minister Lord Barnett, spending is allocated according to population size, rather than the amount each country actually needs.

Critics say this gives Scotland an unfair share of government spending and even Lord Barnett has called for it to be replaced.

According to research at Stirling University, England loses around £4.5 billion of public spending every year because the money is handed to Scotland instead

In other words, this story will not end with a “no” vote from Scotland, unless it is strongly decisive.  Regardless of the result, allowing this referendum to go forward likely will go down as one of the greatest unforced errors in recent times.

Following ONS definitions, the official Scottish Executive figures give public sector employment in Scotland as 580,000 in 2012, having fallen slightly from its peak of 600,000 in 2009 (see Table 1). The 2012 figure represents 23.5 per cent of the total employed population. But there is good reason to suppose that these figures are a considerable underestimate given the amount of out-sourcing and publicly-funded but ‘non-state’ employment. Buchanan et al. suggest that adjusting for these boundary problems would inflate the figure for Scotland (for 2007) by almost a third, from the official figure of 580,000 (including financial institutions) to 772,000. As it happens, the official 2012 figure is the same as the official figure for 2007,  so adjusting the later figure in the same proportion would suggest again a total of 772,000, 31 per cent of the total in employment. These figures seem broadly compatible with those provided by the Centre for Cities on a city basis, which give the Dundee figure as 38 per cent and that for Glasgow as 30 per cent.

This growth of public sector employment is part of the process of de-globalisation evident in Scotland as an accompaniment to de-industrialisation.

That is from Jim Tomlinson, there is more here, via www.macrodigest.com.

The author is Joe Zhang and the subtitle is Is China’s State Capitalism Doomed?  Here is the summary of his conclusions:

1. The state sector remains the dominant part of the Chinese economy.

2. In the past decade, China has erased most (if not all) of the liberalization of the previous two decades.  As a result, the state sector has become more dominant than it was a decade ago.

3. The state sector enjoys widespread public support in China, contrary to perceptions in the West.  there are political, social and cultural reasons for this “strange” situation.

4. The state sector and SOEs are constantly adapting to the public demand for transparency and efficiency.  As a whole, they do not necessarily underperform the private sector.  Indeed, due to systematic discrimination against the private sector, there is evidence to the contrary: the state sector has had a better financial track record in the past three decades.  Indeed, it is not fair to make comparisons given the unleveled playing field.

5. The many challenges China faces today need a robust and well-funded state sector.  At least that is, in my judgment, what the Chinese government and most members of the public think.  These challenges include social inequality, overpopulation, environmental damage, and the depletion of global resources.

I do not agree with every claim in this book, especially the normative ones, but this is one of the better places to go for a look at how the Chinese economy actually works.  Or doesn’t, as the case may be.

Could Scotland just borrow more? I am all for borrowing to cover temporary reductions in income, due to recessions for example, which is why I have been so critical of current austerity. However, as the IFS show, North Sea oil income is falling long term, so this is not a temporary problem. Now it could be that the gap will be covered in the longer term by the kind of increases in productivity and labour supply that the Scottish government assume. Governments that try to borrow today in the hope of a more optimistic future are not behaving very responsibly. However it seems unlikely that Scotland would be able to behave irresponsibly, whatever the currency regime. They would either be stopped by fiscal rules imposed by the remaining UK, or markets that did not share the SNP’s optimism about longer term growth. So this means, over the next five or ten years, either additional spending cuts (to those already planned by the UK government), or (I hope more realistically) tax increases.

There is more here, more Keynesian than I would present my own version of some of those those arguments, but in any case he makes many good points.

The demonstration effect

by on September 12, 2014 at 10:31 am in Current Affairs, Sports, Television | Permalink

Or is it herd behavior?:

Since the video of former NFL player Ray Rice knocking his then-fiancée out in an elevator leaked, the National Domestic Violence Hotline has seen an 84% increase in call volume.

There is more here, from Kottke.

Matt Yglesias writes:

…the Kaiser Family Foundation is out today with new reporting on employer benefit costs that reveals the slowdown is visible in this slice of the market. Premium costs rose by just 3 percent, a number much lower than they routinely rose by in the recent past. So how about those wage rises? Well — let’s just say there’s no evidence that they’re happening.

In other words, there is still downward pressure on real wages, even when we don’t always see real wage cuts.

This also means that the monetary policy argument “there can’t be a build up inflationary pressures because we don’t see real wages rising” is highly unreliable or at the very least a non sequitur (NB: I am not in fact extremely worried about inflationary pressures these days).

From The Wall Street Journal:

Over the past decade, China rushed to buy up global commodities as its economy boomed—both to feed its factories and to ensure it wasn’t reliant on Western powers for raw materials. China’s overseas investments in resources soared to $53.3 billion last year, from $8.2 billion in 2005…

China came late to the global resources boom and often overpaid for assets Western companies had passed over or wanted to sell. China typically paid one-fifth more for oil-and-gas assets than the industry average, estimates Scott Darling, Asian regional head of oil-and-gas research at J.P. Morgan Chase & Co.

…Last year, the head of China’s mining association estimated that 80% of all overseas mining deals had failed, though he didn’t elaborate, according to state media.

The full story, by Wayne Arnold, is very interesting and quite thorough, use news.google.com if you have to.

Unemployment is at 3.7 per cent. Recently, it has been as low as 3.5 per cent, considered by some economists to be pretty much full employment.

That’s one big reason why all that stimulus just won’t have all that much oomph.  It is odd how rarely you hear this mentioned, perhaps because “free lunch” thinking is back in vogue these days.  The entire piece, by David Pilling at the FT, is interesting, it focuses on job market polarization in Japan.  Here is on bit on that:

Outside the ranks of the protected “job-for-lifers” – a much rarer breed these days – nearly 40 per cent of workers are about as flexible as you get. They work in poorly paid jobs for hourly rates. Benefits are all but non-existent. For most of these workers, sometimes referred to as the “precariat”, unemployment is a mere “sayonara” away.

From a longer post:

A closer look reveals that different stocks responded differently to the poll news. Two transportation companies, FirstGroup and Stagecoach Group, lost virtually nothing, and Aggreko, which rents temperature control systems, lost absolutely nothing. Financial and energy/power companies were pounded. An engineering company closely linked to the oil industry, the Weir Group, took a more modest 1.0% loss.

How to sum up?

So far capital markets seem to be telling us that the economic costs of independence to Scotland would be significant but not catastrophic, and that they would be virtually nil to the rest of Britain. How much of those costs are due to the policies Scotland would implement after independence, rather than secession as such? It is difficult to know, but the differential returns to particular firms give us a clue. Transportation companies have closer links to the state, so a more statist policy regime might not hurt them. Financial companies might lose because of the lender of last resort issue (Scotland might not have a credible one). Energy and engineering companies might lose because nationalists want to tax oil heavily to fund social programs. Also, stricter environmental laws may hurt the electric utility SSE, which lost heavily on Monday.

Speculatively, then, capital markets seem to be telling us that the costs of secession as such are modest, but that the costs of dramatically different economic policies are substantial.

But I find this earlier bit less optimistic:

What would happen to these firms’ value if independence were dead certain? Expected utility analysis helps us here. They lost $800 million in value on an increase in the probability of independence of 5.5+2.7=8.2%. We can infer that an increase from 20% to 100% would wipe out $800 million*8/.6=$7.8 billion. That’s a fair proportion of their existing value: about 16%.

There is more here, and for the pointer I thank Chaim Katz.

Robert Laszewski writes:

The 2015 rate increases have been largely modest. Does that prove Obamacare is sustainable? No. You might recall that on this blog months ago my 2015 rate increase prediction was for increases of 9.9%.

You might also recall my reason for predicting such a modest increase. With almost no valid claims data yet and the “3Rs” Obamacare reinsurance program, insurers have little if any useful information yet on which to base 2015 rates and the reinsurance program virtually protects the carrier from losing any money through 2016. I’ve actually had reports of actuarial consultants going around to the plans that failed to gain substantial market share suggesting they lower their rates in order to grab market share because they have nothing to lose with the now unlimited (the administration took the lid on payments off this summer) Obamacare reinsurance program covering their losses.

We won’t know what the real Obamacare rates will be until we see the 2017 rates––when there will be plenty of valid claim data and the Obamacare reinsurance program, now propping the rates up, will have ended.

The post has other interesting points.

Scotland fact of the day

by on September 9, 2014 at 8:38 am in Current Affairs, Economics | Permalink

Scottish banking assets 1,200% of GDP, more than Iceland, Ireland and Spain in 2007.

That is from Robin Wigglesworth.  Of course exactly for this reason, RBS probably would not end up domiciled in a newly independent Scotland.

Let’s hope the #royalbaby manages to keep the Scots on board.

PredictWise and Betfair both say 28.4%.   Last I checked, that is.

Hat tip goes to David Rothschild.

Very good sentences

by on September 6, 2014 at 9:39 pm in Current Affairs, Philosophy, Religion | Permalink

The point is that as a society changes, as what’s held sacred and who’s empowered shifts, so do the paths through which evil enters in, the prejudices and blind spots it exploits.

So don’t expect tomorrow’s predators to look like yesterday’s. Don’t expect them to look like the figures your ideology or philosophy or faith would lead you to associate with exploitation.

Expect them, instead, to look like the people whom you yourself would be most likely to respect, most afraid to challenge publicly, or least eager to vilify and hate.

Because your assumptions and pieties are evil’s best opportunity, and your conventional wisdom is what’s most likely to condemn victims to their fate.

That is from Ross Douthat, on the general lessons of Rotherham.