View all notes
And despite persistent beliefs to the contrary, “printing money” doesn’t translate into massive inflation: when you’re on the edge of a depression, the main problem is avoiding a deflationary spiral. Between September and December 2008, the ECB and the Fed created nearly €2 trillion in new money (10 percent of European or American GDP) and lent it at 0 percent interest to private banks. That helped avoid cascading bankruptcies, without any additional inflation. [...]
Can central banks save us? No, not completely. But they hold part of the key to solving the current crisis. Let’s start from the beginning. There have always been two ways for governments to get money: impose taxes or create currency. Generally speaking, it’s infinitely preferable to impose taxes. The price for printing money is inflation, which creates distributive consequences that are hard to control (those with slower income growth pay dearly) and unsettles trade and production. Moreover, once it’s underway, the inflationary process is hard to stop and brings no further benefit.
[...]
[...] Clearly, after several decades of denigrating the state, it feels more natural to us to print money to save banks than to save governments. Yet the inflationary risk is just as low in both cases, and it can be managed. The ECB could take onto its own balance sheet a good part of the 20 percent of GDP worth of public debt created by the recession, at low interest rates, while announcing that it will raise interest rates if inflation exceeds 5 percent. That won’t excuse European governments from the need to get their finances under control and, above all, finally unite to issue a common European debt, to benefit from low interest rates together. But if they go all in on drastic austerity policies, there is a high risk that it will lead to disaster. Financial crises are part and parcel of capitalism. And when faced with major crises, central banks are irreplaceable. Of course, their infinite power to create money must be kept within bounds. But not to fully use this tool in today’s context would be a suicidal and irrational strategy.
It needs to be said clearly: letting countries that grew rich thanks to intra-European trade siphon off their neighbors’ tax base has absolutely nothing to do with free markets. It’s called theft. And lending money to people who’ve stolen from us without asking anything in return so as to ensure it doesn’t happen again—that’s called stupidity.
These accounts are certainly not perfect. For example, at the world level, the net financial position is negative overall, which is logically impossible unless we assume that on average we’re owned by the planet Mars. More likely, this contradiction suggests that a nonnegligible share of financial assets held in tax havens and by nonresidents is not correctly reported as such. Among other things, this affects the net external position of the Eurozone, which is probably much more positive than official statistics suggest, as the economist Gabriel Zucman has recently shown. Well-off Europeans have every interest in hiding assets, and the European Union for the moment isn’t doing what it should—and could—to deter them.
referring to the national accounts
The second thing to note is that while the Japanese government certainly has a gross debt in excess of 200 percent of GDP, it owns nonfinancial assets on the order of 100 percent of GDP (real estate, land), as well as financial assets also on the order of 100 percent of GDP (ownership stakes in public companies, savings banks, and quasi-public financial institutions). So assets and liabilities more or less balance.
Germany is right to want the banks and other financial institutions that lent to Greece, sometimes at very high interest rates, to pay part of the costs of the current disaster. But simply put, this needs to be done in an orderly, fair, and controlled way, through a specific European-level tax on the banks—not by a partial default of the Greek state.
What’s the difference? It makes all the difference. The problem with default is the blind and unpredictable nature of the consequences. We start by cutting the value of all Greek bonds by a certain amount, let’s say 50 percent: those who lent €100 will be paid back €50 (a 50 percent haircut, in the usual parlance). But since the banks already passed the hot potato thousands of times, often with multiple insurance contracts linking them to other banks (including the infamous credit-default swaps, securities that basically let investors play the lottery on the probability of a Greek default), and since some actors can own Greek debt without even knowing it (for example, in recent years many ordinary savers had “packages” of European debt foisted on them in the fine print of their life insurance contracts), no one knows who will end up footing the bill. There’s no reason to think that the distribution of sacrifice will be fair: in financial matters, the biggest players are often the best informed, getting rid of toxic investments just in time. Above all, there’s every reason to think that the chain of effects on bank balance sheets will result in panic in the European financial system, even cascading bankruptcies. Especially if the markets start anticipating that the same strategy of default and “uncontrolled haircuts” will be applied to the debts of other countries in trouble.
In the symbolic realm, moreover, Jobs and Gates embody the figure of the deserving rich, a soothing idea in times like these. We’ve come close to concluding that their fortunes ($8 billion for Jobs, $50 billion for Gates, according to the Forbes magazine rankings) are exactly what they ought to be in an ideal world, and that all is decidedly for the best in the best of all possible worlds. Unfortunately, wealth is not just about merit, and before we succumb to this attitude of reverence, it’s worth taking a closer look at things.
An initial clue: Jobs the innovator is six times poorer than Gates the Windows rentier—proof, perhaps, that competition policy still has some work to do.
Even more irritating: despite all those great inventions, sold by the tens of millions around the world, despite the explosion in Apple’s stock price these past few years, Jobs still accumulated only $8 billion, one-third the fortune of France’s own Liliane Bettencourt (€25 billion to her name), who, never having worked, has made do with inheriting her fortune. In the Forbes rankings (which do everything possible to understate inheritance, through both their methods and the rhetoric surrounding them), we find dozens of heirs who are richer than Jobs.
I get that he's just going for the easier argument here (that the heiress lady clearly doesn't deserve her money) because it's so much easier for the average reader to agree with and not because he thinks either Jobs or Gates deserve their money, but man, he really missed an opportunity there
Why do the vast majority of economists believe in free trade? Because they learned in school that it’s more efficient, in the first instance, to try to produce as much wealth as possible by relying on free and competitive markets to maximize everyone’s comparative advantage. Even if that means, in the second instance, equitably redistributing the gains, through transparent taxes and transfers within each country. That’s what economists learn at school: efficient redistribution is tax redistribution; markets and prices must be left to do their work, by having as few distortions as possible (this is the famous “free and undistorted competition”), even if that means redistribution later, “in the second instance.”
Not everything in this lovely story is wrong; far from it. Nevertheless, it raises a major problem. Over the past thirty years, trade in goods and services has been profoundly liberalized, mostly in the name of this logic. But the “second instance”—greater redistribution—never came. Just the opposite: international tax competition has hammered the progressive levies that were patiently built up over the preceding decades. The richest benefited from sharp cuts in taxes, even though they were already the main beneficiaries of trade liberalization and globalization. Those of modest means had to be content with higher payroll taxes and consumption taxes, all in a context of wage and employment stagnation. Instead of a more equitable sharing of the gains from liberalization, tax redistribution has, on the contrary, tended to worsen its inegalitarian effects.
Some will say: That’s too bad, but what can you do? If voters’ political preferences led them to choose less tax redistribution, that might be regrettable, of course, but surely we shouldn’t reinstitute trade barriers, since that will only slow an already lagging rate of growth.
Sure. Except, on closer inspection, unconditional trade liberalization and tax dumping work hand in glove. The public authorities have been disarmed without getting anything in return. In fact, by prohibiting import taxes and export subsidies, we’ve encouraged states to develop other tools to promote their domestic production, especially through tax exemptions for foreign investors and highly skilled labor (all of this being entirely permitted, of course). Not to mention the fact that deregulation of financial services and capital flows has directly facilitated tax evasion by both businesses and individuals. Lacking sufficient coordination between countries, the capacity of states to carry out an independent tax policy has been sharply reduced.
On the other hand, there are domains like financial regulation and tax havens where each country can’t do much on its own, where the right level of intervention is clearly European. At the scale of the global economy, France and Germany are hardly bigger than Greece or Ireland. By remaining divided, we’re putting ourselves in the hands of the speculators and tax evaders. This is not the best way to defend the European social model.
That’s why it is urgently necessary to put Eurozone public debts in common, so that markets will stop imposing erratic and destabilizing interest rates on this or that country, along with the corporate tax, which multinational companies are evading on a massive scale. It’s those two tools, and those two tools alone, that must be mutualized and placed under the control of the federal political authority.
while acknowledging that some issues (retirement, income tax, etc) shouldn't be solved via European federalism
The problem of the day is that Cypriot banks, in effect, don’t have that money anymore: it was invested in now-depreciated Greek bonds and real estate investments that were partly illusory. Quite naturally, the European authorities are reluctant to bail out banks without getting anything in return, especially if that ultimately means bailing out Russian millionaires.
just an interesting example of how big the chain of failure was (and still is)