The FT carries an article this morning under the title:
You are too complacent, central bankers warn markets
The summary is that the Fed thinks that shares are over-priced.
The ECB thinks that bonds are over-priced.
The Bank of England thinks that houses are over-priced.
Everyone thinks that there's too much lending.
And so, it argues that all of them are thinking of increasing interest rates but not for the obvious reason of inflation:
In a nutshell, central banks are not necessarily turning more hawkish, in defiance of their inflation stability mandates. Rather they are clearly signalling that investors are becoming far too complacent about the policy outlook – and that risks financial stability. This decoupling between economic and financial cycles is where crises are born.
The last sentence is absolutely right. I agree. In fact, it's glaringly obviously true, as is the risk that we face.
But that leave's the question of what is the answer? Is the answer to force many more into more debt, and to create insolvencies by increasing interest rates? Does that make sense? Or is the need to do something much more radical?
Isn't the real need to increase capital gains tax to reduce the yield on exuberance?
And to have a financial transactions tax to slow markets?
Shouldn't capital gains be charged on houses on death, at least?
And in places where favourable treatment is given to bond taxation shouldn't that be withdrawn?
And what about an investment income surcharge to effectively charge national insurance on capital income to force a reduction in prices by reducing yield?
Reducing tax relief on pension contributions would also help by reducing flows into the market for the time being.
All these things and more are possible to reduce the pressure on markets. They would work. They would hit at the real issues. The amount of 'collateral damage' each would create would be minimal.
So why aren't they being proposed? Ask the central bankers. Their failure to suggest them is a measure of their irresponsibility. And that of the governments to which they are accountable.
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As a former qualified Army marksman up to sniper standard there are targets and targets. Interest rates are a short term blunderbuss, a weapon that hits a long of things besides the target, which may get off lightly. However hitting moving targets is tricky, especially if they see you have them in your sights and there will be time, if only a little, to duck or dive. Also, the penalties are an issue. A friend of mine hit the sergeant in the buttocks and it was the sergeant who was disciplined for failing to get out of the way and issuing orders that were not clear.
Charging cgt on death? I doubt very much the many Labour seats in London that would go down well, plus unless you want to target everyone with the charge the current status quo visa ve IHT mean a lot of the gain will be subject to tax anyway.
Regarding the investment income surcharge, before the tories got rid of it it only applied on ‘investment incomes’ above £7000 back in 1985, so would have to be more than that now surely? Also worth noting (not necessarily defending/may be wrong) but of the few countries that have a wealth tax you promote I read ‘investment income’ in Spain and Norway is only around 20% and 25% compared with around up to 45-55% range yet you support having both? So compared with those 2 countries you could say the UK is regarding income is more progessive in a way. Also cgt in spain is 20% also.
Politics is sometimes about doing the unpopular thing
No tax is popular
Sir,
Your scenario will never come to pass
a) because it is intrinsically unfair.
b) more importantly, because it would be the longest suicide note in political manifesto history .
I say this mainly as a pragmatist who realises the need for political realism to
achieve governmental incumbency and not merely as a person of set politico/economic
viewpoint as indicated by my email country suffix.
Respectfully, I disagree
I think such moves might be very popular
Unfortunately I have to agree with Leslie Plains.
Any party with these proposals in their manifesto would get nowhere near government, the electorate would see to that.
That does not mean however, that I agree with the electorate.
A good project for your students Richard, would be to send them out to local factories, bus depots, offices etc… to gauge the thoughts on taxation of the workers at those places.
I feel the results would disappoint you.
What concerns me is what the government does with this extra taxation, I wholly agree with spending on education, health, social care and such like.
I dislike it being spent on corporate welfare, MP’s expenses, Trident etc…
Other people will feel differently.
I wonder, do you have any idea what makes up government spending?
Or that tax does not cover it?
Yes, I do know what makes up government spending, it is how the government spends SOME of what it takes from taxation, and borrowing.
The local council example above shows the problem at local level also.
You make paying tax dependent on perfection?
Or your personal agreement
First that’s impossible
Second, you ignore democracy
Democracy led to a vote to leave the EU.
It would also lead to a return of the death penalty.
You are right there is no perfection in tax, or anything for that matter.
I notice you don’t comment on my idea for your students, I think you already know what the outcome would be.
I have great respect for your writing and ideas, they are highly sound.
Unfortunately I doubt we will ever see them in our lifetimes.
I run a course for which such work would not be appropriate so I ignored the suggestion
My ideas are already happening
I was told things like country-by-country reporting and automatic information exchange etc would not happen and they are
Completely agree. Just put up a post
http://www.progressivepulse.org/economics/the-duopoly-of-money-creation/
that concludes on how spend and tax (fiscal policy) is much more powerful and useful than setting interest rates (monetary policy).
I thought with corbyn and co doing much better than you expected (personally I thought he would do well from the outset) But what is the point of doing unpopular thing if there is a a lot of waste that would bring in revenue to the equivilant of some of the tax measures you would want? For example we spend among the most on defence in the world, about only the USA and Greece do, which incidentally the state of society in the UK/USA/Greece is in a state of decline to various degrees. And the foreighn policy of USA and UK have hardly been virtuous in recent decades. Which leads to how about cutting back on overseas aid, as it helps the poor (with corbyn maybe it would) but given what the tories have done to the poor here and overseas I cant believe it helps. Those 2 measures alone would save least £15 billion. Or somehow getting companies to actually pay a good wage rather than getting tax payers to subsidize their low pay via tax credits.
There is also waste, such as my local labour run area the council saved £800k on weekly bin collections and around the same figure closing the libaries in the poorest areas and the swimming pool in the poorest area, blaming the tories yet somehow found the money for £16 million in another art complex and £25 million for cycle paths £2 million in different installments for consultants advise they never took. The cycle paths is ridiculous as they claim they do not have much funds for fixing pot holes. I may be totally wrong but to my mind something if fishy here.
I have some sympathy on consulting fees
I strongly suspect there is more to the other stories than you imply or are willing to find out
I admit there maybe but as with the national news I dont follow all of it. The only follow up I am aware of is it later turned out only the salaries of the staff at the libraries would be the ‘saving’ and someone who contacted the labour councillor for one of the wards why they closing them and must be an alternative stated it was cuz it was not used much so may as well.
Two vital points come out of this debate :
1) In an era of economic stagnation interest rates are not really an effective control on anything. Even inflation is now largely driven by Global factors and changes in exchange rates (post Brexit position of the UK being an obvious case where fall of the pound is causing inflation in an economy that is clearly not at capacity). Changes in domestic interest rates are not going to change this, even if they caused domestic demand to fall further. There is even less chance of them directly influencing borrowing. Indeed, increasing interest rates would be more likely to draw in more Global capital into the UK, thereby adding to incentives on banks to lend.
2) Governments around the World have increasingly abdicated responsibility for managing anything to do with their own economies, from monopoly competition and falling employment to even basic fiscal policy. It was very convenient for politicians to say – we will delegate management of the economy to central banks who will use interest rates to target inflation, ignoring all other factors. The big problem with this model is that it no longer works, and in fact there is plenty of evidence that it never did.
The following piece is quite insightful :
https://www.gurufocus.com/news/494452/gmo-the-deep-causes-of-secular-stagnation-and-the-rise-of-populism
I don’t really understand your hostility to higher interest rates. In the 2000s we had asset price inflation, particularly in housing, and apart from saving the banks from defaults, the main purpose of low interest rates over the last nine years has been to try to lock in those inflated housing prices.
For both Labour and the Tories there’s been a cold electoral logic to this. Since 1979 a general election has only twice brought about a change in Prime Minister: in 1997 and in 2000. And in each case this was following a rare fall in house prices. We’d be fools to think that governments of both hues weren’t alive to this. If the value of people’s houses is going up, chances are they’ll survive. If they are falling, they don’t.
But it doesn’t mean it is sound policy; to lock in house price inflation is also to lock in generational inequality. For nine years the young have had to pay more than they would otherwise have done. And they have had also had to accept the risk of a future collapse in prices, when interest rates return to more normal levels. The unearned gains of one generation – yours and mine – are locked in, while all the pain and the risk is shifted to our children.
Consider my own position. I bought a house in 1998, moved in 2001, and then sold the house I then bought in 2006. In doing so over those 7 years I made a a profit of about 220%. It should be obvious that bar government policy to sustain it 2007 to 2008 price were completely unsustainable, and there should have been an adjustment 9 years ago. I don’t understand why you cannot see this.
The longer interest rates are kept low the long this generational unfairness will prevail.
Sorry not a profit of 220%, but still 120% – I’m a lawyer, not an accountant! – but still far too much.
“The reason for house price problems is largely down to not taxing gains on private housing”. I cannot agree with that. There is an inverse relationship between tax and price. House (or more correctly land) prices are too high because they are not taxed enough. The old Domestic Rating System was far better. Council Tax collects only a tiny proportion of land value, especially in London, compared to Business Rates. CGT is a puny transaction tax compared to annual LVT.
The reason for house priced problems is largely down to not taxing gains on private housing
Trashing the rest of the economy for this reason would be absurd, especially when so many houses are now owned outright and this policy would only punish those with mortgages, who tend to be younger
It’s exactly the wrong direction of travel
Largely? So its what about the issue of demand (ie immigration) crucially IN tandem with not building anywhere near enough houses. Plus goverments of all colours centering economic policy on London and South East. Forgetting cgt along income tax lines would be the highest world over, it would also with no indexation whatsoever disproportionately effect those whose homes have gone up say 100% in say 20 years but those whose have gone up same 100% in say only 5. Which given the left from time to time say they want to combat ‘short termism’ in some matters this would disproportionately benefit the short term. For example in Germany/France sale of property is exempt from cgt after 10-20 years. So indexation is a must? If this was to combat overseas buyers whom can afford to buy cash and both leave property empty rather than renting it It would be a more worthy target. If memory serves Mark Field (tory mp) a few years ago backed the idea if a overseas buyer leaves a property empty (presumably for a period) levying a 20% sale price tax irrispective of what they paid to encourage them to rent out the property.
I agree that that one should tax where inflation occurs due to an oversupply of money and these are stock prices, house prices, etc. What about a land value tax and a financial transaction tax?
I will be addressing them soon
On several previous occasions I have suggested in this blog that asset-price inflation was the reason for an emerging hawkishness among central banks. On each occassion I cited the Reserve Bank of Australia as an example because they have been quite open with their concerns about low interest rates fuelling the housing bubble in that country.
Well, it now seems that they are all being more open about it.
That said, your idea of using fiscal measures rather than monetary is, of course, perfectly sound. Fiscal measures are more effective and more easily targeted. In terms of the longstanding fiscal vs monetary debate your suggestion is also openly Keynesian and anti-neoliberal, which is just fine by me.
Unfortunately that last point seems to have been lost on some people as many of the comments in this post have become bogged down in the individual specific proposals. As far as the big picture is concerned you’re on the right track.
On the upside I would nonetheless suggest that there is something positive, some progress perhaps, in the idea that central banks are being pro-active about asset-price bubbles. It could be that they are doing a bit of sabre-rattling to scare governments and markets into action. I believe that the central bankers’ jargon for these attempts at influencing other players is called “forward guidance”. The financial commentators call it “jawboning” and so far that’s all it is.
Actually while I’m on the subject there are other measures that central banks and financial regulators can use that are more effective (?) and less harmful than interest rate rises. I am referring to a tightening of prudential regulations, “macroprudentials” to be specific.
I won’t go on. Readers can google ‘macroprudentials’ if they like. It could be a good subject for another post perhaps?
Agree
May I suggest that one sound (alternative) way to tackle your general proposal is through Annual Ground Rent (aka LVT)?
It is simple, easy (and cheap) to administer and hard to avoid. It is what a tax should be. And for traditionalists, it has a long history. Most other forms of taxation are a blight on the important parts of any economy; enterprise, labour and investment. AGR is not; and therefore it does not suffer from the fundamental problem of the ‘deadweight loss of taxation’.
It’s in a proposal I am now making to be published soon
@ Jim Rounds: I believe that land value tax and financial transaction tax could prove quite popular. Same for taxing stocks … most people cant even dream of buying stocks, so why should they be against taxing them?