Some Spanish lessons

Summer is upon us; Barcelona is swarming with tourists. Doubtlessly, many are here to brush up their Spanish a bit, too. Mauricio Drelichman and I have been writing about some other Spanish lessons - those from Habsburg Spain for modern-day debt markets. The Financial Times carries a brief op-ed piece of ours in tomorrow's edition, explaining the importance of state-contingent debts for avoiding pro-cyclical fiscal policy.... it is remarkable that risk sharing in sovereign debt markets worked much better in the 16th century than it does today!

Laffer curve reflections (Detroit and Spain edition)

Tyler Cowan has some interesting observations on tax rates in (now bankrupt) Detroit - high rates, low revenue. Who would want to live there, given how easily you can move away by a few miles?

Problems for states are different - moving away is costly, though high-skilled people certainly can and do move to greener pastures when times get too awful. There is also another effect that comes from jacking up tax rates, which produces something like the Laffer-curve effect, but for different rates. Spain/Catalunya (some of the income tax here is regional) how has the 3rd highest income tax rates in the world, after Aruba and Sweden (and believe me, public services are not like in Sweden). Strikingly, actual tax revenue relative to GDP is one of the lowest in the OECD -- a full 9% less than the Netherlands, 7% less than Germany, and about on par with Switzerland, where tax rates on the same income are on average half.

This is another way of saying that taxation in Spain (and much of Latin Europe) is hugely distortionary - you have a small part of the economy that can be taxed, and the state squeezes out the last drop; and then there are vast parts where there is hardly an attempt to tax at all. Notary records of property values? much less than what people paid, no problem? No receipt for your purchase in the pharmacy? No problem. Italy introduced an obligation to carry the receipt within a certain distance of every shop to stop tax fraud... not here. The list goes on; all those cars with Andorra licence plates in Barcelona - do these guys really live there? I doubt it. And so, as rates have gone up, the incentive for people to switch from the (legal, efficient) part of the economy to the (untaxed, inefficient) part has gone up hugely. And guess what, it doesn't help with aggregate productivity.

More reasons to worry (Kenen-Mundell edition)

about the Euro, in case you needed them. If countries suffering negative shocks see their young leaving for greener pastures, there is nobody left to pay the debts. Frances Coppola has some good info on this; Paul Krugman spells out the implications for optimum currency area theory. You could add a related wrinkle -- as a country's finances suffer, and tax rates go up, the mobile part of the labor force calls it quits. From anecdotal evidence, there has been a huge outflow from the expat community in Spain, and near-confiscatory taxation (as well as lousy demand conditions) has a lot to do with it. Which is another way of saying that fiscal integration may be the only answer (other than a LOT of trade). 

Barcelona is No. 1 in the World!

in at least one dimension ... not sure what this is based on it, but there is no doubt that there is a real problem here. Just the other day I sat on a plane where the person right and left of me had been robbed, and then got to discuss with the row behind the when where and how because they, too, had lost wallets, passport, luggage, cameras, etc. etc. And if you are wondering if it is a question of will or ability - there is absolutely no problem for the authorities to issue a parking fine within 30 seconds of the infraction having occurred; if they could make money from catching pickpockets, the problem would disappear in matter of months.

Frankfurt gets it...

perhaps some financial history is not a bad thing. Two banks (Metzler and de Rothschild) have endowed a (visiting) professorship in financial history in Frankfurt. It's a timely move... 

bubble time?

To the man with a hammer, everything looks like a nail... So when I first started to ask myself if there is a bubble brewing in German real estate, it seemed at least possible. After all, prices were increasing rapidly, while rents are pretty stable. Surely this is a sign of trouble? Actually, no. I just wrote a small article for the FAZ (in German) arguing that

• prices of existing homes are still lower in real terms than in 1995
• rental yields are healthy - around 4-5%, and not 2% like in Spain at the height of the bubble
• relative to incomes, German real estate is too cheap
• bank credit is being offered with care -- there are no 110% mortgages to illegal immigrants

All of this looks more like a market recovering from decades of relative stagnation, and not like a bubble. What I really want to write about is why the German real estate market is actually an important source of competitive advantage for German industry... but there are all these revisions on my desk...

Clio's rescue mission...

The FAZ blog has a small write-up about why economic history has become more important in recent years, and it cites yours sincerely's work on Philip II (with Mauricio Drelichman) at length... [in German].

The unbearable slowness of financial reform

Over the last few weeks, I have been reading Richard Rhodes' superb The Making of the Atomic Bomb. I was also teaching a class on financial crises last week in the BMSS summer school this year at CREI. One of the striking things is how little financial regulation has come out of the last financial crisis of 2007-08. The Great Depression gave us Glass-Steagall, the SEC, deposit insurance, and ~40 years without a single banking crisis in Europe or the US. Today, we are a full 6 years into the biggest financial crisis since the 1930s, and the proposed tweaks and twists -- read Basle III and related regulation -- are mostly puny. Some procyclical capital provisioning, ok; some limits to off-balance sheet exposures, tick. Serious rethinking of maximum size? Simple leverage limits? Massively higher equity cushions - no, none of the above. Debate is continuing... and it has for about the same length of time as it took to build the first nuclear bomb. As an advisor of mine once used to say "nothing important should take much longer than World War II"...