By Bilal Hafeez 18-09-2019
In: top-picks, Other

Top Picks: Fiscal Policy & Inequality


26th November

It’s clear wealth inequality is a big issue and new research suggests it could get worse. Yet some policies like rent control could make it worse, while others like putting workers on company boards could actually make a difference.

Heterogeneity and Persistence in Returns to Wealth (Equitable Growth) Using micro data from Norway to show that the wealthy actually earn higher returns in similar asset classes than the less wealthy. This perpetuates wealth inequality. [Wealth taxes are coming]

Who Benefits from Rent Control? Evidence from San Francisco (Microeconomic Insights) Stanford University study finds that rent-control policy actually contributes to even more unaffordable housing.

Ownership and Productivity (Stumbling and Mumbling) Argues that UK Labour Party’s proposal to reform corporate governance – by putting workers on boards – may actually increase the UK’s overall productivity as a country.

Germany’s Energy Transition at a Crossroads (Mckinsey) Despite Germany’s transition toward a low-carbon energy system, it will still miss most of its energy-transition targets for 2020.


19th November

Populism is affecting all dimensions of policy. A less discussed but very likely shift will be clamping down in corporate tax dodges. Underlying much of the shift in sentiment is growing inequality. Yet, we may be measuring wrong and we may picking the wrong tools to fix it.

2020: An Inflection Point in Global Corporate Tax? (Deutsche Bank) Jim Reid argues that populism will see higher corporate tax rates across the world.  [Bearish big tech]

Declining Labor Shares of GDP Are Not the Story of Inequality (CEPR) Argues that using declining labour shares of GDP as an indication of inequality is incorrect. This is partly because of the way depreciation of capital is accounted for.

Why US Inequality Is Higher Than Europe’s (Project Syndicate) The pre-income of the US bottom-half has only gone up by 3% since 1980 compared to 40% for Europe. This is due to Europe’s national minimum wages, greater worker protections, free public education and free healthcare. [Bullish Europe]

12th November

We continue our discussion on wealth inequality, a heavily featured topic in the US Presidential run. Harvard’s Taehoon Kim finds that the role of the US as the “banker of the world” contributes to wealth concentration there. The IMF came out with a handy map to use when targeting regional inequality with fiscal policy.

The World’s Banker: On the Rise in U.S. Wealth Inequality (Harvard University) Harvard researchers have developed an equilibrium model to show that global financial integration contributes significantly to income inequalities and the current economic environment in the US exemplifies that. [Bearish global banks]

A Map of Inequality in Countries (IMF Blog) Regional income inequalities in developed economies are increasing over time and have created mobility issues. IMF researchers urge governments to introduce geographically-targeted policies to address this problem.

2nd November

The idea of introducing a wealth tax to solve inequality in the US and beyond has been thrown around a lot recently. Most economists frown upon it (we previously featured Timothy Taylor’s piece crunching numbers to find it makes little sense), but this week we picked an opposing view by Nobel laureate Michael Spence. He sees value in a wealth tax but with some caveats.

Which Wealth Tax? (Project Syndicate) Spence supports Democratic candidates Warren and Sanders in pledging for the introduction of a wealth tax, but only if it’s done right and the cash goes to the bottom 50%. [Bearish US stocks]

How the Rich Are Different: Hierarchical Power as the Basis of Income Size and Class(Blair Fix) A new paper on inequality claiming that the rich of the world are different not because they are more productive or can exploit workers, but because of their hierarchical power or i.e. greater command over subordinates.

The Great Gatsby goes to College: Tuition, Inequality and Intergenerational Mobility in the U.S. (Damien Capelle) Finds that unequal access to higher education in the US has led to increases in returns to human capital, heightened income inequality, and has increased tuition fees and stagnated the enrolment of low-income students.

26th October

The way we work and do research is vastly changing thanks to tech and the automation it brings. There are worries around potential protests emerging from low-skilled workers but also from Academics. We also look at the continuing discussion around inequality, some widely dropping revenue sources in cities and how we can possibly tax the rich more.

Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy (NBER) Billionaires’ geographical location is highly sensitive to state estate taxes. For state-level policymaking, one-time tax revenue gains following the death of a wealthy resident often exceeds the foregone revenues over the remaining lifetime of those who relocate. Bearish state finances and munis.

More Power to the People: Electricity Adoption, Technological Change and Social Conflict (VOX) Uses a historical case of a new technology “shock” (electrification) in Sweden to predict potential reactions to the increasing automation. Finds more local strikes are likely, especially from lower skilled workers, but not against the technology itself, but for higher wages. Suggests higher inflation, therefore bearish rates.

Financial Fragmentation of the Eurozone in Pictures (Money Maven) Funds have been increasingly flowing towards “central” Eurozone countries from “peripheral” European countries since the financial crisis. The general distrust of the “peripheral” countries’ banking systems lies at the heart of the fragmentation problem. Bearish European banks.

19th October

Elizabeth Warren is gaining popularity in the polls. She’s  floating the of a wealth tax. But they could have massive negative implications.  Equally, tax data suggests taxing the rich more won’t fix the budget deficit.

Some Income Tax Data on the Top Incomes(Conversable Economist)Finds the top 50% pays almost all the federal income tax whereas the very top income brackets get away with proportionately less. However, simple math shows that taxing the rich more won’t be enough to balance out the $800bn yearly budget deficit.

MMT Heaven and MMT Hell for Chinese Investment and U.S. Fiscal Spending(Carnegie)Argues thatthere aren’t inherently unacceptable levels of government debt If the government can spend the additional funds in ways that make GDP grow faster than debt. That way, there wouldn’t be runaway inflation or the piling up of debt.

How to Argue for a Wealth Tax(Marginal Revolution)Estimates that a seemingly benign 2% increase in the wealth tax in the US ends up stacking up to a 50-70% net capital gains tax, which can’t be sustained. Proposes a higher consumption tax instead.

12th October

A tax system overhaul – to improve inequality or to solve the climate issues – seems to be on the cards. A concrete and actionable policy plan to be followed by governments is urgent, but no one is offering it.

Thomas Piketty’s New Book: Impressive Research, Problematic Solutions (Bruegel) Critiques three of Piketty’s bold suggestions: reforming corporate governance, a tax system overhaul, and European transnational Federalism – all are appealing but Piketty offers no concrete suggestions on policy.

Fiscal Policies to Curb Climate Change (IMF) The IMF recommends the best policies to tackle climate change, given the Paris agreement has fallen short. Main points revolve around jump in carbon taxes to $75 a ton by 2030 and how to best use the generated revenue.

Undisclosed Debt Sustainability (Alfaro, Kanczuk) Undisclosed and non-transparent lending to developing markets by creditors outside of the Paris Club, most notably by China, is surging and is negatively impacting debt sustainability for traditional (Paris) lenders.

Japan’s Public Sector Balance Sheet (IMF) In-depth analysis of Japan’s large public sector balance sheet, exceeding 210% of GDP in 2017, but now decreasing in net worth. Looks at risks of crossholdings with the public sector and how pension policies for the aging population will add pressure.

4th October

Fiscal stimulus is all the hype and is often cited as the only tool left to steer away from a recession, especially in the Eurozone. Germany might be just warming up to the idea. We also look at solution to the growing issue of unaffordable housing and how to actually build more – not just fuel buying with cheap debt.

Japan’s Government Will Soon Make a Profit on Its Huge Debt (CEPR) Amids raising worries about Japan’s tax lift from 8% to 10%, this commentary reminds that given the negative nominal rate, the debt service burden is virtually zero. Debt is now becoming a source of revenue.

It’s Time for German Fiscal Expansion (Project Syndicate) Advocates that it now makes sense for Germany to spend more without fears of overheating. It should spend more on infrastructure maintenance and modernization, and it could cut payroll taxes. This piece similarly supports fiscal action for the wider Eurozone.

Estimating Regional Wealth in Germany: How Different Are East and West Really? (Kreutzmann, Marek, Salvati, Schmid) Almost 30 years since the German reunification, this paper finds the East lagging in significantly in regional indicators, most notably private net wealth. Each eastern German federal state private wealth comes to less than half of the national mean.

We Cannot Build Our Way Out of Inequality (VOX) The path to a solution of the housing crisis in large metropolitan areas might be to cut regulation in order to build more and denser housing in metro regions (upzoning). The answer is not simple and needs combining education, social, health, and housing policies.

To Tackle Housing Affordability in Canada, Build MoreHouses (IMF) Argues that to solve the lack of affordable housing in Canada (and most of the Western World), we need accelerated process of supplying houses. Sounds simple – but governments have been too focused on making borrowing quicker and accessible – which fuels house price surges.

20th September

Many are clamouring for more fiscal policy, but it may not be so straightforward. There are clamours for taxing the rich, yet others argue for spending on big infrastructure projects. Then, some argue that fiscal policy won’t solve for real shocks to the economy like trade uncertainty.

The Return of Fiscal Policy (Project Syndicate) Former Goldmans Sachs Asset Management Chairman argues for greater government investments in long-term projects given interest rates are so low.

Taxing the Rich: Issues and Options (NYU, Batchelder and Kamin) Propose 4 viable ways to tax the rich – increase top tax rate, tax wealth on accrued gains, a wealth tax on the rich and a financials transactions tax.

Fiscal Stimulus Under Sovereign Risk (Minnepolis Fed) Finds that fiscal policy is often pro-cyclical as fears of heightened sovereign risk during recessions induce austerity. To overcome this, the authors argue for “fiscal policy forward guidance”.

Germany’s Real Business Cycle (Scott Sumner) He argues that Germany does NOT need a fiscal stimulus as its recent weakness is due to a real shock (trade war) rather than a nominal shock (eg sticky wages in face of weak labour market).

13th September

Taxing Wealth by Taxing Investment Income: An Introduction to Mark-to-Market Taxation (Washington Center for Equitable Growth) Argues for taxing capital gains on a mark-to-market basis rather than on disposal. Another policy aimed at introducing and refining wealth taxes at a time of rising inequality in the US.

Germany to Play Smokes and Mirrors Again (Bill Mitchell) MMT advocated Bill Mitchell argues that Germany uses entities like KFW to engage in fiscal stimulus.

Reallocating Public Spending to Reduce Income Inequality: Can It Work? (IMF) Paper finds that a country can reduce inequality while keeping expenditure fixed if it shifts money away from defense and towards social protection and infrastructure.

The Impact of Brexit on UK Firms (Bank of England) Finds business uncertainty has increased, investment has fallen by 11% over three years and productivity has fallen as top management diverts time to Brexit preparations.