While your editor opposes fiscal tightening and measures to cut the deficit short-term, because of the risks of Japanese style deflation, there are a few quickie fixes I would like to see.
Congress should close the inheritance tax loophole for billionaire deaths for the rest of 2010. It cannot be done retroactively but it can cover the rest of the year.
And the carried interest tax break for hedge fund manager fees should be cut.
And an international measure to tax rapid-fire electronic trading in stock, forex, and bond markets would be a boon to the world.
Meanwhile the chances of cracking down on US tax evaders with accounts at UBS is falling because the necessary legislation is being blocked by the lower house of William Tell’s mini-parliament in Berne. Swiss bank secrecy has to be lifted by law, and the locals don’t like giving in to foreign pressures.
From Nobel-prize winning economist Joseph Stiglitz:
As long as there are the megabanks that are too big to fail, government will, more likely than not, ‘blink’ again. Too-big-to-fail institutions have an incentive to engage in excessive risk-taking: Heads they win; tails taxpayers lose.
They also have a competitive advantage not based on greater efficiency but on the implicit subsidy of a future government bailout. Thus, every provision that levels the playing field — imposing additional restrictions on risk-taking, setting higher capital requirements or imposing additional fees — needs to be retained.
Distorted incentives that encourage excessive risk-taking and shortsighted behavior were, of course, endemic throughout our financial system.
There is a legitimate debate about whether certain derivatives should be viewed as insurance or gambling instruments. But in either case we should regulate them, and not encourage or subsidize them — as we do today. For example, derivatives are given priority over other elements of the capital structure when a firm fails. This preferential treatment needs to end.
In the final [finance reform] bill, there must be provisions ensuring that taxpayers are not underwriting these risky products. But the law doesn’t stop that. It says only that such ‘insurance’ shouldn’t effectively be subsidized by taxpayers.
Another specious argument is that it is better to have the derivatives written by well-regulated banks rather than by unregulated entities. Such arguments are an admission of failure to achieve effective comprehensive regulatory reform.
But if that were the case, the answer would be: Fix the real problem. Fill in the gaps in regulatory oversight. Don’t shift the burden of another regulatory failure onto taxpayers.
Regulators must have a clear congressional mandate: The country needs, indeed, the country demands, real reform.
From Paul Krugman’s New York Times blog of today:
Some thoughts on the fiscal austerity mania now sweeping Europe: is anyone thinking seriously about how this affects the rest of the world, the US included?
We do have a framework for this issue: the Mundell-Fleming model (does anyone still learn this stuff?) Fiscal contraction in one country under floating exchange rates is contractionary for the world as a whole. Fiscal contraction leads to lower interest rates, which leads to currency depreciation, which improves the trade balance of the contracting country — partly offsetting the fiscal contraction, but also imposing a contraction on the rest of the world. (Rudi Dornbusch’s 1976 Brookings Paper went through all this.)
Now, the situation is complicated by the fact that monetary policy is up against the zero lower bound. This transmission mechanism seems to be happening right now, with the weakness of the euro turning eurozone fiscal contraction into a global problem.
Folks, this is getting ugly. And the US needs to be thinking about how to insulate itself from European masochism.
Beggar my neighbor was the insane tactic which extended the Great Depression. We need to avoid doing this again. Fiscal tightening risks exactly that outcome.
Paul Volcker writing in the New York Review of Books:
Ireland has been caught up in its own speculative excesses and financial deficits, culminating in a sharp economic decline. There is a lot of grumbling, about banks in particular. But I came away with another impression. The people I spoke to had an understanding that the boom had gotten out of hand. There seems to me a determination to do something about the situation, reflected not just in the words of the political leaders but in support for action among the public. And there is a sense of what is at stake, that the gains they made in recent years have been placed in jeopardy. The urgent need to get back on a sustainable budgetary and economic track is well understood.
In the United States, we don’t seem to me to share the same sense of urgency. We view ourselves as a huge and relatively self-sufficient country, in control of our own destiny. We have time to sort out our priorities, to decide what to do, and to do it. There are elements of truth in those propositions, but the time is growing short.
Restoring our fiscal position, dealing with Social Security and health care obligations in a responsible way, sorting out a reasonable approach toward limiting carbon omissions, and producing domestic energy without unacceptable environmental risks all take time. We’d better get started. That will require a greater sense of common purpose and political consensus than has been evident in Washington or the country at large.
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