Financial sector bubble and tax competition

John Kay's article in Financial Times (April 24, 2009) talks about how virtual profits of the banking sector in the UK in the last decade generated substantial revenues from corporation tax and income tax on bonuses.

It reminded me of what I have been arguing in the recent presentation (April 24) at the Polish Economics Association. In essence, I said that the collapse of the financial sector's profits bubble will help dispel the myth that international corporate tax competition resulting in ever lower CIT rates is nothing to worry about because corporate tax revenues have not been declining. Now we know that revenues have so far been artificilly inflated by taxing financial sector's profits. CIT revenues will finally feel the pull of gravity. The benefits of tax competition and supply-side response ("lowering CIT rates will always pay for itself") will deservedly lose some of its credibility. This in turn will help start in earnest the debate on the need to coordinate taxes.

I believe that tax coordination would make a lot of sense for new EU member states (benefits for the EU as a whole would be smaller). I wrote about it (although in a roundabout IMF style) in an IMF Working Paper written in August 2008 together with Mariusz Jarmuzek.

The Coming Golden Age of New Europe?

I presented a paper on "The Coming Golden Age of Europe?" at an international conference on "1989-2029: 20 Years of Transition and Perspectives for Development of Post-socialist Economies", April 3-4 2009, Kozminski University in Warsaw (here is the shorter version in Powerpoint slides.

I got really excited about the subject (thought about it for some time already and finally found an excuse to write about it) and now am thinking about turning it into a book. I have a feeling that New Europe is underappreciated, particularly now during the crisis, by both the West and New Europeans themselves.

This is research in progress. Any comments/suggestions are very much welcome, either on the blog (preferably) or directly to my email mpiatek@kozminski.edu.pl

Here is an abstract of the paper:

Abstract

New Europe has never had it so good before. Its income, quality of life, and level of happiness have never been closer to that of the developed countries in Western Europe. Despite the crisis, New Europe will continue to grow faster than Western Europe for decades to come, continuing its catching-up. By 2050, New Europe’s income per capita is likely to be almost equal to that of Western Europe, the highest level ever recorded in the history of the region. Moreover, the overall quality of life will be practically indistinguishable from that in Western Europe. New Europe’s true Golden Age will finally arrive.

By 2050, New Europe is also likely to achieve a higher level of income per capita than most emerging market countries. New Europe not only has stronger economic fundamentals, but is also less vulnerable than other emerging markets to political, social, and economic Black Swans, catastrophic events which could wipe out much of the achieved economic progress.

The Golden Age, however, will not arrive without help from policymakers. The crisis has shown that the current development model based on a rapid financial deepening fueled by imported savings intermediated by foreign-owned banks has lost some of its credibility. New development models are needed that would lessen reliance on financial deepening in favor of productivity growth, euro adoption, open borders to immigration, and further EU integration. The crisis provides a good opportunity for the needed change.

Entering the euro zone during the crisis - debate at KUL, Lublin, May 5

I speak on the panel "Szanse i zagrożenia wynikające z wprowadzenia waluty Euro w Polsce w czasach kryzysu gospodarczego" with, inter alia, Prof. Zyta Gilowska, former minister of finance 2006-08.

Below an abstract (in Polish) of my speech:

Streszczenie
Polska powinna jak najszybciej zamienić złotego na euro jeśli chce zostać regionalną potęgą i jednym z liderów Unii Europejskiej. Za wejściem do strefy euro przemawia wiele: od eliminacji kosztów transakcyjnych, ryzyka kursowego, przez wzrost handlu i inwestycji po spadek stóp procentowych i—co dobitnie uwidacznia kryzys—zapewnienie gospodarce stabilnych warunków działania. Badania NBP i międzynarodowych instytucji wskazują, że korzyści z wejścia do strefy euro przewyższają jego koszty. Korzyści są dodatkowo tym większe, im większa początkowa różnica w poziomie rozwoju. Nie warto więc czekać, aż dokona się proces realnej konwergencji: wejście do euro ma być środkiem na przyspieszenie procesu doganiania Europy Zachodniej, a nie jego uwieńczeniem.
Do szybkiej akcesji do strefy euro trzeba się jednak przygotować. Przede wszystkim do strefy euro trzeba wejść po konkurencyjnym kursie. Przykład Portugalii, Grecji czy ostatnio Słowacji pokazuje jak szkodliwe dla wzrostu gospodarczego może być jego przewartościowanie. Kryzysowe osłabienie złotego daje nam szansę uniknąć ich błędów. Trzeba ponadto zacieśnić politykę budżetową, bo przed i po wejściu do euro to ona będzie głównym amortyzatorem szoków, wzmocnić nadzór nad rynkiem finansowym, żeby uchronić się od przyszłych baniek spekulacyjnych, oraz podtrzymać wysokie tempo wzrostu wydajności pracy poprzez inwestycje w infrastrukturę, edukację i innowacje i pełne otwarcie rynków pracy dla wysokowykwalifikowanych imigrantów. Kluczowe będzie uzyskanie politycznego i społecznego konsensusu.
W procesie akcesji do euro powinniśmy pytać nie tylko o to co my możemy zrobić dla strefy euro, ale również o to co jej obecni członkowie mogą zrobić dla nas. Trzeba bowiem uelastycznić kryteria wejścia do strefy euro. Kryzys pokazał, że kryterium inflacyjne i korytarz walutowy ERMII, wymyślone prawie dwadzieścia lat temu, kiedy rynki finansowe były o wiele mniej rozwinięte, a o rozszerzeniu Unii nikomu jeszcze się nie śniło, w obecnej postaci mają mało ekonomicznego sensu. Kurs walutowy jest przede wszystkim przedmiotem globalnej gry spekulacyjnej, na którą rodzima polityka gospodarcza ma niewielki wpływ. Skoro samemu euro nie udaje się utrzymać stabilnego kursu, to jak można tego wymagać od Polski?
Razem powinnyśmy pracować, aby euro wzmocnić. Celem powinno być zastąpienie przez euro amerykańskiego dolara jako wiodącej waluty świata. Trzeba będzie ujednolicić politykę fiskalną, zintegracować rynki finansowe, scentralizować czuwające nad nimi nadzory oraz stworzyć płynny rynek euroobligacji. Nie uda się tego zrobić bez wzmocnienia politycznej siły Unii.
Akcesja do strefy euro będzie zwieńczeniem sukcesu polskiej transformacji oraz historyczną cezurą nadejścia nowego Złotego Wieku dla Polski i Nowej Europy. W zeszłym roku dochód na głowę mieszkańca w naszym regionie osiągnął najwyższy poziom w stosunku do Europy Zachodniej od 1500 roku. Po ustaniu kryzysu dochód będzie dalej rosnąć. Z euro Złoty Wiek nadejdzie szybciej.

Maastricht criteria: all about politics, not economics

Paul de Grauwe in a brilliant post in Voxeu.org argues the following: "Thus, the Maastricht convergence criteria are instruments that are used in arbitrary ways to pursue political objectives. In the past, they were set aside to achieve the political objective of monetary unification. Today, they are strictly applied to pursue a political objective of slowing down the enlargement of the Eurozone".

Couldn't agree more: Western Europeans simply don't want New Europeans to join the euro and they are using the Maastricht euro criteria as their excuse.

Why do they do it? It is probably a mixture of (i) reluctance to share power in the euro zone, (ii) concern about increasing competitive pressure, particularly if New European countries join the euro zone at competitive rates (Slovakia, however, didn't), (iii) dogmatism, (iv) and (deeply secreted) view that New Europeans are just still too barbarian to be trusted to be let into the exclusive euro club (here, alas, some of new EU member states are not helping).

As to the crisis, euro zone authorities seem to share a view that New Europe "had it coming" and they have themselves to blame for being so exposed to the crisis. New Europeans, like me, would argue instead that ECB and EC are partly to blame for the crisis in New Europe: rejecting Lithuania's application for entry in 2006 over a trivial rounding error in inflation was a clear signal that Eastern Europeans are simply not welcome. This removed the euro reform anchor for the whole region, contributing to more relaxed macroeconomic policies and later a bigger crisis (particularly in the Baltic States). One wonders how things would have been different if ECB/EC let Lithuanians in (I don't buy the argument that EC was right that inflation in Lithuania would rise because it did rise not only in Lithuania but in most euro zone countries. and so what? Even with higher inflation, Lihuania's contribution to euro zone inflation would be something around 0.05 pp. Really scary!!!!:-)). By now, Estonia would probably also be in, joining together with Slovakia in Jan 2009. Poland and other countries in the region would be pretty close too. The whole region would have been much more insulated from the crisis, saving thousands of jobs and strengthening the only region of the EU that ever has chances of growing at Asian rates (which supposedly is the goal of all these EU programs, starting from the Lisbon agenda). Instead the whole region is deeply mired in crisis, on the brink of collapse...is this what Western Europeans had in mind???

BTW, here is my op-ed in Financial Times (December 2008) on the need to change euro entry criteria.

Poland spends a lot on tertiary education

Figure taken from the Economist's article on the success of the Bologna process aiming to standardize education in the EU. Poland, surprisingly, is ranked among countries spending on tertiary education the most. Promising, I guess (all the usual complaints about the quality of Polish education notwithstanding), particularly as the outcomes of all this spending are pretty good: Poland and other New European countries, especially the Czech Republic and Estonia, score high on OECD PISA rankings, well above what their level of income per capita would suggest. To say it differently, New Europeans get roughly the same educational outcomes despite spending in $ per capita about half as much as developed countries. Quality of education seems to one of the few good legaceis of communism...

Original article here: http://www.economist.com/world/europe/displaystory.cfm?story_id=13527558

My quote in the Economist article on the Polish economy

The article argues that Polish economy is in a better shape that other countries in the region, but that it doesn't mean that the authorities should be complacent. I am quoted as saying that the government has "brilliant PR", but doesn't really do much to help the economy.

What I am not quoted on is what I have written about in my articles in the Polish edition of Wall Street Journal: monetary policy doesn't work, fiscal policy is procyclical (by cutting public expenditure makes the crisis worse) and there are no structural reforms to speak of (except for last year's big change in the early retirement benefits - here congratulations are due). More on this topic soon.

Debate on the crisis organized by Krytyka Polityczna, April 24, Poznan

I will take part in the second debate organized by Krytyka Polityczna, this time in Poznan.

Poznań: Wokół „Kryzysu”
Goście: Ryszard Bugaj, Tomasz Wróblewski, Marcin Piątkowski. Prowadzenie: Adam Leszczyński.24 kwietnia, piątek, godz. 17.00, Gmach Główny Uniwersytetu Ekonomicznego, ul. Niepodległości 10, sala 111

Details here: http://www.krytykapolityczna.pl/Poznan/Poznan-Wokol-Kryzysu-/menu-id-174.html

Krugman - make banking boring again!

Fully agree: http://www.nytimes.com/2009/04/10/opinion/10krugman.html?_r=1

"Poland - Key to Europe" by Buell

Now reading a book on "Poland - Key to Europe" by Buell published in 1939.

The book is fascinating. The main message I am getting so far is that Poland today is in unbelievably better political, social, military, and economic position than before 1939.

There is a couple of cool historical quirks that I like so much. For instance, in 1927 Poland, in return for a stabilization loan from the US, had to appoint a foreign financial advisor to the Council of the Bank of Poland, apparently to "watch over us". Charles Dewey, an American assistant secretary at the Treasury, assumed the position for three years. Sounds like a banana republic...

Debate on the crisis organized by Krytyka Polityczna, April 9

09.04.2009
Materiał audio i fotorelacja z debaty wokół książki Kryzys. Przewodnik Krytyki Politycznej.Spotkanie odbyło się 8 kwietnia 2009 na Wydziale Nauk Ekonomicznych UW. Goście: Witold Gadomski, Piotr Kuczyński, dr Marcin Piątkowski, prof. Jan Jakub Michałek. Prowadzenie: Jacek Żakowski.

http://www.krytykapolityczna.pl/Aktualnosci/Warszawa-Relacje-z-debaty-wokol-Kryzysu-/menu-id-1.html

My presentation at PTE (Polish Economics Association) on April 23, 16:30

It will talk on corporate tax competition and its implications for Central and Eastern Europe based on the IMF paper I co-authored wih Mariusz Jarmuzek back in 2008: http://www.imf.org/external/pubs/ft/wp/2008/wp08203.pdf

Here are the slides and the transcipt of the panel discussion (in Polish), which also featured Dr. Maciej Grabowski, deputy minister of finance responsible for taxes, and Dr. Jaroslaw Neneman, former tax deputy minister of finance.

Simon Johnson's tour de force on financial sector's capture of the US administratin

This is a must read: http://www.theatlantic.com/doc/200905/imf-advice

I agree with practically everything that Johnson says. It wil be extremely hard to change the way the financial sector works without a forceful state intervention, including nationalization.

Martin Wolf from FT also noticed the article: http://www.ft.com/cms/s/0/09f8c996-2930-11de-bc5e-00144feabdc0.html

I am back after a long break...

Ready to blog again. This is a great a way of organizing my thoughts, presentations, articles, and agenda. Readers welcome!