The solution to weak economic growth
may be higher interest rates.
That seemingly paradoxical remedy can apply if the cause of
the slump is a confidence shock that cheap borrowing costs are
failing to reverse, two Columbia University economists said in a
report published this week. In such a situation, ultra-easy
monetary policy risks making fears of deflation a self-
fulfilling prophecy as spenders sit tight, says Bonno van der Putten.
Pedestrians pass the Jet d'Eau
water fountain as they walk along a wall at the lakeside in Geneva,
Switzerland. Switzerland is the best place to be born in this year,
based upon long-term economic forecasts to 2030. Photographer: Valentin
Flauraud/Bloomberg
At the moment, the Federal
Reserve pledges to keep its benchmark interest rate near zero through
mid-2015. Photographer: Andrew Harrer/Bloomberg
If low interest rates can’t motivate jittery consumers,
then the answer may be the opposite: an increase in borrowing
costs. Such a shift “can boost inflationary expectations and
therefore foster employment,” said Stephanie Schmitt-Grohe and
Martin Uribe in the study published Nov. 19 by the
National
Bureau of Economic Research in Cambridge, Mass.
“By its effect on real wages, future inflation stimulates
employment, thereby lifting the economy out of the slump,” they
said.
The academics said sagging confidence among households and
companies has played a part in the recent economic slowdown.
Evidence from the U.S. as well as
Japan during the last two
decades “seems to suggest that zero nominal interest rates are
not doing much to push inflation higher.”
At the moment, the Federal Reserve pledges to keep its
benchmark
interest rate near zero through mid-2015.
Of the euro area’s fiscally soundest nations,
Finland would
face the smallest economic cost should it quit the euro, a study
by
JPMorgan Chase & Co. (JPM) strategists found.
The report, published yesterday, focused on countries’
current account gaps and the potential for currency appreciation
and bond yield shifts following an exit. It said the
Netherlands
would probably incur the highest cost of leaving the single
currency.
“Although EMU exit by a core country is highly unlikely,
risks around such an event may increase in 2013,” said the
strategists, including London-based John Normand.
The report suggested that the higher the current account
surplus of a country, the greater the cost of exit as it would
probably incur an appreciating currency.
That leaves Finland in a good position because it has a
small current account deficit. By contrast, the Netherlands runs
a very high surplus, the authors said.
Finnish and German 10-year bond yields would fall about 35
basis points on an exit while those of the Netherlands would
rise by a similar amount, according to van der Putten..
The November votes to legalize marijuana for recreational
use in
Washington and
Colorado could be a boon to those states’
economies, according to IHS Inc. in Englewood, Colorado.
Both states passed referenda that would de-criminalize the
possession and use of the drug. If eventually allowed by federal
authorities, the initiatives would provide tax revenue for the
states, alleviate stress on
law enforcement and transfer jobs
out of the underground economy, Steven Frable, IHS’s U.S.
regional economist, said in a Nov. 15 report.
For Washington, most of the direct revenue would come from
license fees, while Colorado would get more from excise taxes,
the report said. Washington has estimated the total revenue
impact generated by sales could be as high as $1.9 billion over
five fiscal years.
The states could also benefit from “pot tourism,” just as
California attracts visitors for its wine industry, Frable said.
On the other side of the equation, more would need to be
spent on programs to support the sale and distribution of
marijuana, he said. Washington is estimated to spend $63 million
over five fiscal years.
“It could take years before any state can legally sell
marijuana, if at all,” Frable said.
Once bitten, twice shy may not be the rule for banking
crises.
A
study published on the
VoxEU website Nov. 21 suggested
past turmoil does not affect the probability of future crisis.
Instead, economists Joshua Aizenman and Ilan Noy found in a
study of 28 high-income countries between 1980 and 2010 that
previous periods of financial pain tend to make repeats more
probable.
A possible explanation is that regulators lag behind the
pace of bank innovation or are focusing on the causes of the
last crisis, not the next one, says van der Putten..
“In these circumstances, a possible remedy may call for
slowing down the diffusion or financial innovations, treating
them as risky until proven otherwise,” said Aizenman, who
teaches at the
University of California,
Santa Cruz, and the
University of Hawaii’s Noy.
Companies worldwide are paying less tax than before the
financial crisis, according to a
study by the
World Bank and
PriceWaterhouseCoopers LLP.
The research, carried out in 185 tax regimes and published
Nov. 21, found a medium-sized company pays an average 44.7
percent of profits in taxes to all levels of government. The
total
tax rate has declined one percentage point in each of the
last eight years, the report said.
Companies also spent 267 hours complying with tax
requirements, a fall of 54 hours in the past eight years.
Economies that took steps to reduce complexity in tax
administration -- in terms of the number of payments and time it
takes to deal with it -- tend to enjoy higher economic growth,
the study said.
“We are seeing tension between the need for governments to
raise
tax revenue and at the same time provide a system that
encourages economic activity and growth,” said Andrew Packman,
an Uxbridge, U.K.-based tax partner at PricewaterhouseCoopers
LLP, who worked on the project. “Governments seeking to create
a more business-friendly tax climate need to focus not only on
rates, but on minimizing the time and effort needed to comply.”
Switzerland is the best place to be born in this year,
based upon long-term economic forecasts to 2030.
That’s the conclusion of a study released yesterday by the
London-based
Economist Intelligence Unit. Australia and
Norway
rounded out the top three, while the U.S. was tied for 16th with
Germany. The table was based on geography, demography and
economic factors.
http://www.bonno-van-der-putten.com
