I now have a column at the US News and World Reports "Economic Intelligence" blog. I will be covering issues of interest to the middle class every Wednesday. Here are the links to my first two articles:
"Want Jobs Back? Axe Tax Subsidies"
"The Tide is Turning Against Tax Havens"
Enjoy!
Wednesday, April 17, 2013
Tuesday, April 16, 2013
Breaking: Reinhart/Rogoff Shot Full of Holes UPDATED X3
This story is rapidly making the rounds in the blogosphere today, and it is indeed a big deal. One of the most significant economics papers underlying the argument for why high government debt (especially over 90% of gross domestic product) is bad for growth was published in 2010 by Carmen Reinhart and Kenneth Rogoff, "Growth in a Time of Debt" (ungated version here).
The basic finding of this paper was that if debt exceeds 90% of GDP, then on average growth turns negative. But as Thomas Herndon, Michael Ash, and Robert Pollin report in a new paper (via Mike Konczal at Rortybomb), there are substantial errors including data omitted for no reason, a weighting formula that makes one year of negative growth by New Zealand equal to 19 years years of decent growth by the UK, and a simple error on their spreadsheet that excluded five countries from their analysis altogether (see Rortybomb for the screen shot).
The authors say that with these errors corrected, the average growth rate for 20 OECD countries from 1946 to 2009 with debt/GDP ratios over 90% is 2.2%, not the -0.1% found by Reinhart and Rogoff. This is a huge difference. We still have a negative correlation between debt/GDP and growth rate, but it is much smaller, as we can see from Figure 3 from their paper:
Debt/GDP Ratio R/R Results Corrected Results
Under 30% 4.1% 4.2%
30-60% 2.8% 3.1%
60-90% 2.8% 3.2%
Over 90% -0.1% 2.2%
As Paul Krugman (link above) argues, what we are likely seeing is reverse causation: slow growth leads to high debt/GDP ratios. That is certainly what EU countries are finding as they implement austerity measures and slip back into recession. But even if high debt/GDP did cause slower growth, we can see it is nowhere near the crash that Reinhart and Rogoff's paper made it out to be.
The bottom line here is simple: the focus on deficits and debt that have dominated our political discourse is completely misplaced. We need to do something about the unemployment crisis by increasing growth, something that is even truer in the European Union where the unemployment rate in Spain and Greece exceeds 26%.
Update: Reinhart and Rogoff have responded in the Wall Street Journal. They emphasize that there is still a negative correlation, and that having debt/GDP above 90% for five years or more reduces growth by 1.2 percentage points in developed countries, which is still substantial for developed economies.
Update 2: Paul Krugman's response to Reinhart and Rogoff is here. He pronounces it very disappointing, saying they are "evading the critique."
Update 3: Reinhart and Rogoff have a new response in the Financial Times (registration required). Here, they admit they committed the Excel error, but claim there was nothing nefarious in their disputed data choices:
It's obvious that the austerity crowd is still going to defend this paper, but that doesn't mean anyone else should be taken in by them.
Cross-posted at Angry Bear.
The basic finding of this paper was that if debt exceeds 90% of GDP, then on average growth turns negative. But as Thomas Herndon, Michael Ash, and Robert Pollin report in a new paper (via Mike Konczal at Rortybomb), there are substantial errors including data omitted for no reason, a weighting formula that makes one year of negative growth by New Zealand equal to 19 years years of decent growth by the UK, and a simple error on their spreadsheet that excluded five countries from their analysis altogether (see Rortybomb for the screen shot).
The authors say that with these errors corrected, the average growth rate for 20 OECD countries from 1946 to 2009 with debt/GDP ratios over 90% is 2.2%, not the -0.1% found by Reinhart and Rogoff. This is a huge difference. We still have a negative correlation between debt/GDP and growth rate, but it is much smaller, as we can see from Figure 3 from their paper:
Debt/GDP Ratio R/R Results Corrected Results
Under 30% 4.1% 4.2%
30-60% 2.8% 3.1%
60-90% 2.8% 3.2%
Over 90% -0.1% 2.2%
As Paul Krugman (link above) argues, what we are likely seeing is reverse causation: slow growth leads to high debt/GDP ratios. That is certainly what EU countries are finding as they implement austerity measures and slip back into recession. But even if high debt/GDP did cause slower growth, we can see it is nowhere near the crash that Reinhart and Rogoff's paper made it out to be.
The bottom line here is simple: the focus on deficits and debt that have dominated our political discourse is completely misplaced. We need to do something about the unemployment crisis by increasing growth, something that is even truer in the European Union where the unemployment rate in Spain and Greece exceeds 26%.
Update: Reinhart and Rogoff have responded in the Wall Street Journal. They emphasize that there is still a negative correlation, and that having debt/GDP above 90% for five years or more reduces growth by 1.2 percentage points in developed countries, which is still substantial for developed economies.
Update 2: Paul Krugman's response to Reinhart and Rogoff is here. He pronounces it very disappointing, saying they are "evading the critique."
Update 3: Reinhart and Rogoff have a new response in the Financial Times (registration required). Here, they admit they committed the Excel error, but claim there was nothing nefarious in their disputed data choices:
The 'gaps' are explained by the fact there were still gaps in our public debt data set at the time of the paper. Our approach has been followed in many other settings where one does not want to overly weight a small number of countries that may have their own peculiarities.This is a very odd response from two authors who equated one year of New Zealand to 19 years of the far larger UK economy. Worse still when you add the fact that by excluding several years when New Zealand had a debt/GDP ratio over 90%, they got an "average" (actually only one year) growth rate of -7.6%, when the correct average, with all relevant years over 90% included, was 2.58%, a 10.18 point swing!
It's obvious that the austerity crowd is still going to defend this paper, but that doesn't mean anyone else should be taken in by them.
Cross-posted at Angry Bear.
Friday, April 12, 2013
Good News on Tax Havens
The mega-research project on tax havens I told you about in November has borne its first fruit. In a data dump 160 times the size of that which put Bradley Manning and Julian Assange in jail, the International Consortium of Investigative Journalists (ICIJ) has used over 2.5 million documents to publish the names of beneficial owners of numerous offshore accounts, based primarily in the British Virgin Islands.
According to the New York Times, the report "disclosed confidential information on more than 120,000 offshore companies and trusts and nearly 130,000 individuals and agents, including 4,000 Americans." The headlines at the ICIJ website tell the story (though you should read them yourself):
"Dutch Banking Giants Help Clients Go Offshore"
"Billionaires Among Thousands of Indonesians Found in Secret Offshore Documents"
"The Swiss Lawyers Who Help Europe's Richest Families Park their Wealth Offshore"
"French Banks Traded in Secrecy"
"Lawyers and Accountants Help Rich Manage Their Money"
The list goes on and on. Besides naming the names of the clients, however, the stories frequently highlight the enablers -- global banks, accounting firms, tax lawyers, and so forth -- without whom none of this would be possible.
This story is having special resonance in France, long a critic of tax havens and low-tax jurisdictions like Ireland. Prior to the ICIJ release, the country's budget minister, Jérôme Cahuzac, had been forced from office after it was revealed that he had offshore accounts and lied about it. Bad as it was to have the minister in charge of investigating tax fraud himself be a fraudster, the ICIJ release revealed that President Francois Hollande's campaign treasurer, Jean-Jacques Augier, had secret accounts in the Cayman Islands, though Augier denied any wrongdoing.
In response, Hollande on Wednesday announced a series of steps to deal with the scandals (via Tax Research UK), ordering his cabinet ministers to disclose their finances, appointing a special prosecutor, demanding country-by-country financial reporting by French companies (long proposed by the Tax Justice Network), and calling for the "eradication" of tax havens "in Europe and worldwide."
The data dump and French initiatives are not the only good news on tax havens. Luxembourg, one of the world's pre-eminent secrecy jurisdictions, announced that it would begin automatic account information exchange with the European Union, and that it was negotiating the same thing with the United States under the Foreign Account Tax Compliance Act (FATCA). Previously, Luxembourg had only been willing to withhold taxes on foreigners' accounts and pay them anonymously to their respective EU national tax authority.
Tuesday, France, Germany, Italy, Spain, and the United Kingdom announced that they would begin automatic account information exchange with each other.
Finally (via Tax Research UK), the European Union agreed to country-by-country reporting for EU companies in the extractive industries worldwide. According to the report, this is similar to, but stronger than, Dodd-Frank rules requiring publicly-held oil, gas, and mining companies to report all payments to foreign governments above $100,000 to be reported to the Securities and Exchange Commission. The EU rules go further by including the logging industry as well as privately-held companies.
As if all this news weren't good enough, Richard Murphy at Tax Research UK says "there is more to come next week." Stay tuned.
According to the New York Times, the report "disclosed confidential information on more than 120,000 offshore companies and trusts and nearly 130,000 individuals and agents, including 4,000 Americans." The headlines at the ICIJ website tell the story (though you should read them yourself):
"Dutch Banking Giants Help Clients Go Offshore"
"Billionaires Among Thousands of Indonesians Found in Secret Offshore Documents"
"The Swiss Lawyers Who Help Europe's Richest Families Park their Wealth Offshore"
"French Banks Traded in Secrecy"
"Lawyers and Accountants Help Rich Manage Their Money"
The list goes on and on. Besides naming the names of the clients, however, the stories frequently highlight the enablers -- global banks, accounting firms, tax lawyers, and so forth -- without whom none of this would be possible.
This story is having special resonance in France, long a critic of tax havens and low-tax jurisdictions like Ireland. Prior to the ICIJ release, the country's budget minister, Jérôme Cahuzac, had been forced from office after it was revealed that he had offshore accounts and lied about it. Bad as it was to have the minister in charge of investigating tax fraud himself be a fraudster, the ICIJ release revealed that President Francois Hollande's campaign treasurer, Jean-Jacques Augier, had secret accounts in the Cayman Islands, though Augier denied any wrongdoing.
In response, Hollande on Wednesday announced a series of steps to deal with the scandals (via Tax Research UK), ordering his cabinet ministers to disclose their finances, appointing a special prosecutor, demanding country-by-country financial reporting by French companies (long proposed by the Tax Justice Network), and calling for the "eradication" of tax havens "in Europe and worldwide."
The data dump and French initiatives are not the only good news on tax havens. Luxembourg, one of the world's pre-eminent secrecy jurisdictions, announced that it would begin automatic account information exchange with the European Union, and that it was negotiating the same thing with the United States under the Foreign Account Tax Compliance Act (FATCA). Previously, Luxembourg had only been willing to withhold taxes on foreigners' accounts and pay them anonymously to their respective EU national tax authority.
Tuesday, France, Germany, Italy, Spain, and the United Kingdom announced that they would begin automatic account information exchange with each other.
Finally (via Tax Research UK), the European Union agreed to country-by-country reporting for EU companies in the extractive industries worldwide. According to the report, this is similar to, but stronger than, Dodd-Frank rules requiring publicly-held oil, gas, and mining companies to report all payments to foreign governments above $100,000 to be reported to the Securities and Exchange Commission. The EU rules go further by including the logging industry as well as privately-held companies.
As if all this news weren't good enough, Richard Murphy at Tax Research UK says "there is more to come next week." Stay tuned.
Wednesday, April 10, 2013
How High Does Senior Poverty Have to Go?
It's official: President Obama has proposed cutting Social Security by replacing the program's current inflation adjustment with the stingier "chained" Consumer Price Index. As I've discussed before, this risks undoing all the progress made against senior poverty since the passage of Medicare and Medicaid in 1965. 25% of seniors were poor according to official poverty line in 1968, compared to just 9.4% in 2006. Note, however, that the Supplemental Poverty Measure, which includes things like out of pocket health care expenses which hit seniors disproportionately, already shows a 16.1% rate by 2009. And our senior poverty rate, measured by the international standard of 50% of median income, is already 25%, much higher than most developed countries, more than three times Sweden's rate and over four times as high as Canada.
Why is Obama doing this? We just rejected the candidate who wanted to cut Social Security and Medicare. Perhaps, as Krugman (link above) suggests, he chasing the fantasy of "being the adult in the room," but this is a losing proposition. As Brian Beutler points out:
If this cut really happens, Social Security benefits will steadily fall in true inflation-adjusted terms due to the magic of compounding. Moreover, with 49% of the workforce having no retirement plan at work and another 31% with only a grossly inadequate 401(k), the cuts will worsen the coming retirement crisis. The only question will then be: how high will senior poverty have to go before we do something about it?
Cross-posted at Angry Bear.
Why is Obama doing this? We just rejected the candidate who wanted to cut Social Security and Medicare. Perhaps, as Krugman (link above) suggests, he chasing the fantasy of "being the adult in the room," but this is a losing proposition. As Brian Beutler points out:
Just like that, Chained CPI morphs from a thing President Obama is willing to offer Republicans into a thing Republicans dismiss as a “shocking attack on seniors.”We've seen this game before. The Heritage Foundation's health care plan became "death panels" when President Obama endorsed it. And, as Beutler's title makes clear, we have plenty of examples of the President negotiating with himself to bad effect, most notably in the 2011 debt ceiling battle.
If this cut really happens, Social Security benefits will steadily fall in true inflation-adjusted terms due to the magic of compounding. Moreover, with 49% of the workforce having no retirement plan at work and another 31% with only a grossly inadequate 401(k), the cuts will worsen the coming retirement crisis. The only question will then be: how high will senior poverty have to go before we do something about it?
Cross-posted at Angry Bear.
Wednesday, April 3, 2013
Trans Pacific Partnership Bad for the Middle Class: Just How Bad is the Question
What you don't know can hurt you. I think that's a clear lesson of some so-called trade agreements the United States has signed over the last 20 years, and illustrated further by the few that have been defeated, most notably the Multilateral Agreement on Investment, negotiated by the Organization for Economic Cooperation and Development from1995 to 1998, but then abandoned in the face of ever growing protests.
Haven't heard of the Trans Pacific Partnership? That's no surprise: while the negotiations are not really being conducted in secret (the Office of the US Trade Representative provides periodic updateshere UPDATE 3/3/21: here is a working link for US negotiating goals), the level of disclosure from the USTR office rarely ventures beyond bland statements like this:
How do we evaluate the TPP? We have to see it as having at least three major elements: a trade agreement, an investment agreement, and an intellectual property agreement.
From the trade agreement alone, we can conclude that it is a bad deal for the middle class. As I explained last year, the Stolper-Samuelson Theorem in economics tells us that more trade is actually bad for labor in this country, because by global standards, the U.S. is labor-scarce (low population density), meaning that we expect trade to lead to more intense competition in labor-intensive goods, putting downward pressure on wages. Alas, that isn't the end of it.
There is a lot of controversy about the investment side of the agreement. As discussed by my fellow contributor at Angry Bear (I repost many of my posts there), Daniel Becker, the investment chapter was leaked and published by the Citizens Trade Campaign. Before I discuss the TPP investment provisions, a little context on investment agreements first.
According to the United Nations Conference on Trade and Development (UNCTAD),at the end of 2011 there were 3190 international investment agreements, of which 2860 were between two countries, usually known as bilateral investment treaties or BITs. Investment agreements can also be part of larger agreements, such as the investment chapter of NAFTA, the WTO's Agreement on Trade-Related Investment Measures (TRIMS), and various regional trade agreements. Since the TRIMS agreement, in force since 1995, applies to all WTO members, it is a global benchmark; thus, people will refer to agreements with stronger provisions as "TRIMS+."
The purpose of investment agreements is to protect foreign investors, which are by definition multinational corporations (MNCs). At the same time, they place no corresponding duties on investors, only on the host government. Most significantly, these agreements remove dispute settlement from the host country's court system to binding arbitration in an outside body, most commonly the World Bank's International Center for the Settlement of Investment Disputes (ICSID). As with domestic arbitration clauses, this removal from the courts favors the business interests involved. So the investment agreement element of the TPP will tend to be bad for host governments (the U.S. is host to more foreign investment than any other potential TPP country) and by extension the middle class.
But "how bad" is the question. This depends on what restrictions the agreement puts on governments. Originally, MNCs wanted to be protected against having their property nationalized ("expropriated") by the host, but more recent agreements such as NAFTA's investment chapter (Chapter 11; text here) have opened the way to defining "expropriation" in ways that include regulatory actions that may reduce the value of the investment, even if they are non-discriminatory among firms and taken in the public interest. This is why I say above that investment agreements are bad for the middle class, because it normally benefits from public interest regulation.
For these reasons, there is in fact significant pushback regarding the content of investment agreements. Three good sources for this are UNCTAD, the Vale Columbia Center on Sustainable International Investment, and the International Institute for Sustainable Development.
So what's in the TPP investment chapter? As far as I can tell, nothing that isn't already in NAFTA, other U.S. free trade agreements, or a U.S. bilateral investment treaty. The problem is, that's bad enough. Under NAFTA, for example, Metalclad won a dispute against Mexico over a local government's refusal to grant it a permit to open a hazardous waste facility, and was awarded $16.7 million. Ethyl Corporation successfully challenged a Canadian ban on the import of gasoline additive MMT, leading Canada to withdraw the ban and pay the company $13 million in compensation. To have unelected bodies that (in the words of Citizens Trade Campaign) "would not meet standards of transparency, consistency or due process common to TPP countries’ domestic legal systems" overturning democratically adopted laws or regulations is profoundly undemocratic.
At the same time, I think Becker reads a little too much into some of the language. He quotes section 12-6bis (Becker's emphasis):
Haven't heard of the Trans Pacific Partnership? That's no surprise: while the negotiations are not really being conducted in secret (the Office of the US Trade Representative provides periodic updates
On November 12, 2011, the Leaders of the nine Trans-Pacific Partnership Countries - Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam, and the United States - announced the achievement of the broad outlines of an ambitious, 21st-century Trans-Pacific Partnership (TPP) agreement that will enhance trade and investment among the TPP partner countries, promote innovation, economic growth, and development, and support the creation and retention of jobs.The USTR website continues by claiming that the agreement will be "increasing American exports, supporting American jobs." This is all too similar to the Clinton administration's reporting on NAFTA, which would point out all the gains from increased exports while omitting any mention of increased imports (Journal of Commerce, Nov. 18, 1994, via Nexis, subscription required) which quickly turned a small trade surplus with Mexico into a huge trade deficit.
How do we evaluate the TPP? We have to see it as having at least three major elements: a trade agreement, an investment agreement, and an intellectual property agreement.
From the trade agreement alone, we can conclude that it is a bad deal for the middle class. As I explained last year, the Stolper-Samuelson Theorem in economics tells us that more trade is actually bad for labor in this country, because by global standards, the U.S. is labor-scarce (low population density), meaning that we expect trade to lead to more intense competition in labor-intensive goods, putting downward pressure on wages. Alas, that isn't the end of it.
There is a lot of controversy about the investment side of the agreement. As discussed by my fellow contributor at Angry Bear (I repost many of my posts there), Daniel Becker, the investment chapter was leaked and published by the Citizens Trade Campaign. Before I discuss the TPP investment provisions, a little context on investment agreements first.
According to the United Nations Conference on Trade and Development (UNCTAD),at the end of 2011 there were 3190 international investment agreements, of which 2860 were between two countries, usually known as bilateral investment treaties or BITs. Investment agreements can also be part of larger agreements, such as the investment chapter of NAFTA, the WTO's Agreement on Trade-Related Investment Measures (TRIMS), and various regional trade agreements. Since the TRIMS agreement, in force since 1995, applies to all WTO members, it is a global benchmark; thus, people will refer to agreements with stronger provisions as "TRIMS+."
The purpose of investment agreements is to protect foreign investors, which are by definition multinational corporations (MNCs). At the same time, they place no corresponding duties on investors, only on the host government. Most significantly, these agreements remove dispute settlement from the host country's court system to binding arbitration in an outside body, most commonly the World Bank's International Center for the Settlement of Investment Disputes (ICSID). As with domestic arbitration clauses, this removal from the courts favors the business interests involved. So the investment agreement element of the TPP will tend to be bad for host governments (the U.S. is host to more foreign investment than any other potential TPP country) and by extension the middle class.
But "how bad" is the question. This depends on what restrictions the agreement puts on governments. Originally, MNCs wanted to be protected against having their property nationalized ("expropriated") by the host, but more recent agreements such as NAFTA's investment chapter (Chapter 11; text here) have opened the way to defining "expropriation" in ways that include regulatory actions that may reduce the value of the investment, even if they are non-discriminatory among firms and taken in the public interest. This is why I say above that investment agreements are bad for the middle class, because it normally benefits from public interest regulation.
For these reasons, there is in fact significant pushback regarding the content of investment agreements. Three good sources for this are UNCTAD, the Vale Columbia Center on Sustainable International Investment, and the International Institute for Sustainable Development.
So what's in the TPP investment chapter? As far as I can tell, nothing that isn't already in NAFTA, other U.S. free trade agreements, or a U.S. bilateral investment treaty. The problem is, that's bad enough. Under NAFTA, for example, Metalclad won a dispute against Mexico over a local government's refusal to grant it a permit to open a hazardous waste facility, and was awarded $16.7 million. Ethyl Corporation successfully challenged a Canadian ban on the import of gasoline additive MMT, leading Canada to withdraw the ban and pay the company $13 million in compensation. To have unelected bodies that (in the words of Citizens Trade Campaign) "would not meet standards of transparency, consistency or due process common to TPP countries’ domestic legal systems" overturning democratically adopted laws or regulations is profoundly undemocratic.
At the same time, I think Becker reads a little too much into some of the language. He quotes section 12-6bis (Becker's emphasis):
Notwithstanding Article 12.9.5(b) (Non-Conforming Measures, subsidies and grants carveout), each Party shall accord to investors of another Party, and to covered investments, non-discriminatory treatment with respect to measures it adopts or maintains relating to losses suffered by investments in its territory owing to armed conflict or civil strife.
He goes on to speculate that this could give rise to compensation claims due to interpreting protests against the Keystone pipeline, or even strikes, as "civil strife." However, the exact same language is in NAFTA's investment chapter, and there have been no such claims in its entire history. Moreover, this is what we would expect since the language only pertains to government behavior ("it adopts"), not private behavior.
So, that's two strikes against the agreement. The third strike is intellectual property, something Matt Yglesias caught over a year ago. As I analyzed then, the TPP "would ban government health services from negotiating prices with pharmaceutical companies." Given that many countries already do this and the U.S. ought to do it to help rein in health costs, if these provisions stay in the final agreement it will be a very bad development.
Hooray for baseball season, but that's three strikes against the TPP. This is a bad deal that will put further downward pressure on real wages which have gone 40 years since reaching their peak, that will undermine governments' ability to regulate, and will strengthen a small group of pharmaceutical, software, entertainment, and publishing companies at the expense of the rest of us.
3/3/21: Thanks to reader Lisa G. for updating a dead link.
Cross-posted at Angry Bear.
Wednesday, March 27, 2013
EU Proposes Tighter Rules on Investment Incentives
The European Commission's Directorate-General for Competition is the EU equivalent of the U.S. Department of Justice Anti-trust Division plus units for controlling domestic subsidies to industry. According to a new policy briefing from the European Policies Research Centre at the University of Strathclyde, DG-Competition has released a draft of new regulations on "regional aid" (subsidies to firms in poorer regions of the EU) that, among other things, includes tighter rules on investment incentives.
EU rules on subsidies to business have long fascinated me because they present a stark contrast to the totally unregulated bidding wars for investment we see here in the United States. As I have shown, EU Member States have been able to obtain investments with far lower subsidies than U.S. states have, even for the same company! A big part of this is due to the rules on regional aid, which specify the maximum subsidy each region can give to a business, and reduce that maximum for investments over € 50 million. The proposed rules for 2014-2020 go further than ever before.
The big change is that large firms would only be eligible for regional aid in areas with gross domestic product per capita below 75% of the EU average, that is, only in the poorest areas of the European Union (plus so-called "outermost regions" like French Guyana). Currently, countries are allowed to give subsidies in regions that are only poor relative to national standards, and every Member State has areas that qualify to give investment incentives to large firms.
This would be a gigantic change, as many whole countries would no longer be able to give investment incentives to large firms. These countries are:
Belgium
Denmark
Germany
Ireland
France (except for outermost regions)
Cyprus
Luxembourg
Malta
Netherlands
Austria
Finland
Sweden
These countries would still be able to give regionally based investment subsidies to small and medium sized enterprises, which are defined as companies with fewer than 250 employees and either sales of less than or equal to € 50 million annually or a balance sheet of less than or equal to € 43 million.
If we did this in the United States, it would be the equivalent of saying that every part of the country with at least 75% of average per capita income would be barred from giving investment incentives, which of course would mean the poorest areas could give less than they do currently. This is obviously a political non-starter; we have to focus now on transparency and ending subsidized job piracy. But it's interesting to look ahead sometimes and see what kind of controls on subsidies are technically feasible.
Thanks to Fiona Wishlade, director of the European Policies Research Centre, for sending this report to me.
EU rules on subsidies to business have long fascinated me because they present a stark contrast to the totally unregulated bidding wars for investment we see here in the United States. As I have shown, EU Member States have been able to obtain investments with far lower subsidies than U.S. states have, even for the same company! A big part of this is due to the rules on regional aid, which specify the maximum subsidy each region can give to a business, and reduce that maximum for investments over € 50 million. The proposed rules for 2014-2020 go further than ever before.
The big change is that large firms would only be eligible for regional aid in areas with gross domestic product per capita below 75% of the EU average, that is, only in the poorest areas of the European Union (plus so-called "outermost regions" like French Guyana). Currently, countries are allowed to give subsidies in regions that are only poor relative to national standards, and every Member State has areas that qualify to give investment incentives to large firms.
This would be a gigantic change, as many whole countries would no longer be able to give investment incentives to large firms. These countries are:
Belgium
Denmark
Germany
Ireland
France (except for outermost regions)
Cyprus
Luxembourg
Malta
Netherlands
Austria
Finland
Sweden
These countries would still be able to give regionally based investment subsidies to small and medium sized enterprises, which are defined as companies with fewer than 250 employees and either sales of less than or equal to € 50 million annually or a balance sheet of less than or equal to € 43 million.
If we did this in the United States, it would be the equivalent of saying that every part of the country with at least 75% of average per capita income would be barred from giving investment incentives, which of course would mean the poorest areas could give less than they do currently. This is obviously a political non-starter; we have to focus now on transparency and ending subsidized job piracy. But it's interesting to look ahead sometimes and see what kind of controls on subsidies are technically feasible.
Thanks to Fiona Wishlade, director of the European Policies Research Centre, for sending this report to me.
Tuesday, March 26, 2013
Speaking of Inequality (with correction)
Travis Waldron at Think Progress pointed out this excellent article by David Cay Johnston. It dovetails well with my last post, which showed the fall of individual real wages and their failure to regain their peak fully 40 years after it was reached.
Johnston writes:
From 1966 to 2011, adjusted gross income in the bottom 90% grew a total $59 (2011 dollars, not the 1982-84 dollars I used in my last post) in 45 years, from $30,378 to $30,437.
"Candidate Bush said his tax cuts would make everyone prosper. But the real average pretax income of the bottom 90 percent in 2011 was $5,340 less than in 2000, a decline of more than $100 per week, or 15 percent, in pretax income."
The income share of the bottom 90% fell from 66.3% to 51.8% over the 1966-2011 period.
So we have seen inequality increase in pretax income plus changes in tax policy that have reduced the effective tax rates on corporations and capital gains, income which goes overwhelmingly to the rich. Thus, post-tax inequality is even worse than pretax inequality.
Johnston's report builds on the work of economists Emmanuel Saez and Thomas Piketty. Together with Facundo Alvaredo and Tony Atkinson, they have created the World Top Incomes Databases, very much worth checking out for a comparative look at U.S. inequality.
Correction: I initially saw Johnston's article linked from Think Progress, not Daily Kos, as I realized almost immediately after I hit the "publish" button. Apologies to Travis Waldron.
Johnston writes:
Incomes and tax revenues have grown from 2009 to 2011 as the economy recovered, but an astonishing 149 percent of the increased income went to the top 10 percent of earners.While this data is at the level of tax filing households, it is consistent with what we see at the level of the individual. More nuggets from Johnston:
If you wonder how that can happen, the answer is simple: Incomes fell for the bottom 90 percent.
From 1966 to 2011, adjusted gross income in the bottom 90% grew a total $59 (2011 dollars, not the 1982-84 dollars I used in my last post) in 45 years, from $30,378 to $30,437.
"Candidate Bush said his tax cuts would make everyone prosper. But the real average pretax income of the bottom 90 percent in 2011 was $5,340 less than in 2000, a decline of more than $100 per week, or 15 percent, in pretax income."
The income share of the bottom 90% fell from 66.3% to 51.8% over the 1966-2011 period.
So we have seen inequality increase in pretax income plus changes in tax policy that have reduced the effective tax rates on corporations and capital gains, income which goes overwhelmingly to the rich. Thus, post-tax inequality is even worse than pretax inequality.
Johnston's report builds on the work of economists Emmanuel Saez and Thomas Piketty. Together with Facundo Alvaredo and Tony Atkinson, they have created the World Top Incomes Databases, very much worth checking out for a comparative look at U.S. inequality.
Correction: I initially saw Johnston's article linked from Think Progress, not Daily Kos, as I realized almost immediately after I hit the "publish" button. Apologies to Travis Waldron.
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