17/11/2012: Flat tax and economic efficiency

A new paper on flat tax systems, "Flat Tax Reform in an Economy with Occupational Choice and Financial Frictions" by Radim Boháček and Jozef Zubrický, (The Economic Journal, Vol. 122, Issue 565, pp. 1313-1345, 2012 | http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2174793).

The paper modeled a flat tax and capital tax reforms "in an economy with occupational choice and borrowing constraints. [The paper introduces] entrepreneurs as an occupation… [and compares] steady state allocations [between] a progressive tax schedule [and] steady states with a flat tax at different exemption levels with or without a capital tax reform. [The authors] find that for low exemption levels the flat tax reform is efficient as well as welfare improving for both occupations."

This is quite interesting, since in traditional flat tax literature, there are usually welfare gains to entrepreneurs and welfare losses to employees (of smaller magnitude than gains to entrepreneurs, so overall system of flat taxes is welfare enhancing for the economy as a whole).

17/11/2012: China's Great Famine

This is a book everyone must read - a historical account of China's Great Famine 1958-1962 wholly created by the biggest mass-murderer in human history - the Communist ideology. 

One reviewer wrote: "Tombstone is the most important, most exhaustive work ever written about the tragedy. It opens a new window on what happened with research we’ve never had access to, bolstered by first-hand accounts by Chinese memoirists."

A review from the Boston Globe (here) is worth reading as well.

16/11/2012: FTT - two bits of new evidence

Financial Transactions Tax news:

First we have new research from the Bank of Canada (link here) stating:
"Little evidence is found to suggest that an FTT would reduce speculative trading or volatility. In fact, several studies conclude that an FTT increases volatility and bid-ask spreads and decreases trading volume. Furthermore, a number of challenges associated with the design and effectiveness of an FTT could limit the revenues that FTTs are intended to raise. For these reasons, countries considering the
imposition of FTTs should be aware of their negative consequences and the challenges involved in implementation."

And next we have early stage evidence from just a few months of FTT operations in France: here.

I wrote on the topic of FTT for a number of years now. Here's an article from 2010. Here's more from 2010. And more on the blog. I am also working with two co-authors on a comprehensive literature review of the FTT, which so far is not going well for supporting the idea of FTT.

Stay tuned.

Updated: and here's a SoberLook take on the French experience with FTT. Paragraph below the quote explains the little French problem... oh, well, it's a War on Speculators, then.

16/11/2012: Russian economy Q3 2012

In contrast with contraction (-0.1%) in the Euro area (see my note on Dutch woes here), Russian economy grew 2.9% in Q3 2012 - slightly ahead of consensus expectations (2.8%). However, Q3 growth marked the slowest pace of expansion since Q1 2010. Main drivers of growth performance were:

• Private consumption remaining on slower growth path
• Declining growth rate in investment (on monthly basis, September data showed surprise decline of 1.3% in overall investment - the first contraction since Q1 2010)
• Industrial production increased 2% y/y in September, almost unchanged from August 2.1% rise. However strong PMI data for October should provide some boost.
• Weaker demand for agricultural commodities was a drag on exports, alongside shallower demand for extraction sectors exports.

The net effect is that slowdown in consumer demand growth and capex are likely to adversely impact Irish exports to Russia. However, I don't foresee significant or prolonged effect here. More on bilateral trade flows to follow in subsequent analysis, so stay tuned.

Update: 

15/11/2012: Dutch Debt Crisis and a Tripple-dip Recession?

With Eurostat publishing today preliminary estimates for Euro area GDP for Q3 2012, the Netherlands have moved firmly into the view as the country with substantial pressure on its economy.

Take a look at the core numbers:

• In Q3 2012, the Dutch economy contracted 1.1% q/q - the sharpest quarterly contraction in all fo the EU27
• This contraction follows 0.1% growth in Q2 and Q1 2012 and a contraction of 0.7% in Q4 2011
• In other words, in q/q terms, the Netherlands are now heading for a tripple-dip recession.
• In year on year terms, things are bleaker still: Q4 2011 say annual contraction of 0.4%, which was followed by a 1.0% drop in Q1 2012, 0.4% decline in Q2 2012 and now 1.4% decline in Q3 2012.

The problem the country faces, despite having a AAA-rated government debt and relatively minor issues on the fiscal side, is the debt overhang in the household sector. As charts below show, the Netherlands has the second highest gross debt/GDP ratio in the EU27 and the highest in the euro area. The debt overhang in the household sector is getting worse, not better, during the current crisis.

Gross debt to GDP ratio on households side has the same (directionally, but potentially more severe in magnitude) effect on future growth as the Government debt. Based on the OECD and IMF data:

And here are some comparatives from Goldman Sachs Research, highlighting the Netherlands plight:

 Note: HP change refers to House Prices change

All of which makes the Netherlands a 'sick man' of Europe and helps explain why the Dutch Government is rightly concerned with the costs of underwriting peripheral economies 'rescue' using its own money...

15/11/2012: The impossibility of Greek 2020 targets

Euromoney headlines today with an article on the impossibility of 120% debt/GDP ratio target for Greece (link here). It so happens that few days ago, I crunched through my own estimates on Greek debt holdings and dynamics. The below is based on data from:

• Goldman Sachs Research (debt allocations)
• IMF WEO
• My own scenario 2 for growth shock

Here are the institutions holding Greek debt: 

Using IMF scenario (best case scenario, based on current 2013-2017 growth projections and 2018-2020 growth at 2017 growth rate of 4.586% nominal - representing the highest annual rate projected by the IMF for 2012-2017) and my own adverse scenario (assuming growth of 2.84% on average annually in 2014-2020 as opposed to the IMF assumed average growth of 3.59% on average), the table below shows summary of forecasts for 2020 debt outrun under:

1. Status quo - implying 2020 outrun of 137% debt/GDP ratio in the case of IMF own projections and 148.5% debt/GDP ratio in my scenario 2;
2. Case of imposing 75% haircut on ECB-held Greek Government debt (a writedown of €33.52bn) resulting in IMF-consistent scenario estimate of 123.2% debt/GDP ratio in 2020 and 134.1% debt/GDP ratio under my adverse growth scenario 2;
3. Case of imposing - in addition to a 75% writedown of ECB-held debt - a writedown of 25% of EFSF-held Greek debt, delivering savings / cuts to the debt of €62.74bn - and yielding 2020 Government debt/GDP ratio of 111.2% in the case of IMF projections for growth (scenario 1) and 121.4% in the case of my scenario 2.

Thus, the bottom line is: unless 

1. IMF projections for 2.84% average growth in 2014-2017, plus my assumption that in 2017-2020 Greek economy were to growth at the 2017 IMF-projected 4.59% hold, a 75% haircut on ECB-held Greek Government debt will not be enough to get Greek Government debt/GDP ratio anywhere close to 120%.
2. To ensure probabilistically likely delivery on 2020 target of 120% debt/GDP ratio, Greece requires much more than a writedown of 75% of its ECB-held liabilities, but will most likely require some sort of action on EFSF side as well.