Friday, November 18, 2011

Is it feasible the two speed euro zone?
The notion of the “two speed euro zone” , foster speculation whether it is a kind of yellow light for countries which refuse to go on with necessary reforms to stay in the euro zone, or it is a real possibility to get Europe and the global economy out of the economic recession territory .
European Union, is currently the largest economic zone of the world with 16% of world GDP (IMF 2010). 11,3% of its imports comes from USA, (13,5% comes from NAFTA),and 18,8 % comes from China ,(33,7% comes from BRIC Countries).This means that the global economic recovery, is undoubtedly connected with EU engine running. The latest IMF economic projections , suggest for the Euro zone, weak economic growth with GDP within the 0,5 - 1% range for 2012.
On the other side, the austerity programs in highly debtors EU countries ,has a strong bias to the so called “self adjustment path”. This depend heavily on:
a.- Markets flexibility to get the necessary cost gains to improve competitiveness, (there is a reallocation between losing money sectors, toward those winning profit sectors).
b.- Fiscal policy rejecting its countercyclical nature.
The expected outcome, is a deeper and longer recession than otherwise.
This self adjustment path, has failed before in countries with debt problems ,(although not equivalent to the ones of European countries,Argentina 2001, Chile 1982), because it denies the fundamentals for debtor countries to be succesful in their effort to overcome the situation :
a.- Economic growth (to decrease the Debt /GDP ratio, and as a consequence to improve access for additional financial resources(lower rate of interest).-
b.- Structural investment loans (roads, ports, airports), coupled with structural adjustment loans (higher efficiency in public sectors, incentives to winning sectors and the like)
c.- The Lender of last resort , (Central Bank or the IMF, or both),and the interest rate levels .
Thus, the “two speed Euro zone” arises as an transitory alternative,(just the way when you have to drive your car at lower speed because of bumping in the road), to break up the Euro stability restrictions (self adjustment bias), allowing debtor countries to work within a more flexible framework, (like a physician trying to save a life ). It would also protect those still solvent countries, but with potential liquidity problems, if they cannot get back to the growth path soon. Finally, as it has been suggested by key analysts, there is the risk of disorderly Euro zone break up, which might become increasingly possible, as the recession get deeper ( ), unless something beyond current approach is done sooner than later, to avoid that the whole effort become politically unsustainable.

Friday, November 04, 2011

Tax reforms and government efficiency (II)
Do Governments have incentives to be efficient?.What is the real meaning of tax efficiency?.What is the real burden taxes imposes on welfare level?.These questions ,should come along for tax reforms.
Governments do not have incentive to be efficient, because its key role is to be effective, which means it has to do what it is demanded by citizens needs. So, the standard of evaluation about government performance, should be the fulfillment of those needs. The efficiency issue, arises when it comes to the tools used for that purposes. But, Governments follows political criteria rather than economic one, to choose those tools. The cost of efficiency for Government actions, seems to be higher than its benefits, because it limits the impact .Besides, the principle of politics decisions rely on seeking the best possible outcome , but not necessarily at the lowest cost.
On the other side, Wagner Law (1883),suggest that the main support for economic growth should be government actions, because economic growth increase revenues. But this is a long term scenario while government faces short run demands.
The real meaning of tax efficiency(simple, fair and efficient), do not consider the other side of the coin. It deals only with its effect on resource allocation based on prices, assuming there is no gap between social and private values . However, this gap exist and it turns out to be that taxes cover up this gap and government inefficiencies. Therefore, there is no efficient taxes, but fair and simple taxes.
What about the burden tax imposes on welfare levels?.Some years ago, there was a discussion concerning Arnold Harberger´s calculations to measure such a burden(roughly less than 2%-3% of USA ,gdp), because his outcome was not precise enough .Others economist, claimed to be more reliable on this calculations. But no matter how precise the methodology was, as long as it did not include government inefficiency ( which also impose a burden on welfare level), any result was not an exact valuation of the real burden. Taxes impose an higher real burden on welfare levels, because it helps to finance government inefficiency .
Laffer ´s proposal of lower taxes make sense regarding the issue of government inefficiency, (leaving aside the impact on investment and employment which by the way is complementary with government efficiency ).In fact , when taxes go up revenues might decrease not only because its impact on incentives, but also because government inefficiency to collect them. A recent report, (Citizens for fair taxes), shows that 280 of the more important firms in the USA, did not pay the tax they should have (2010-2011).
What are the implications of all of these hypothesis for tax reforms?.

a.- Fair taxes imply much more than the progressive or regressive nature of tax rates. It also deal with its share to finance government inefficiencies.
b.- Higher tax revenues , might be additional resources for financing government inefficiency and inequality. Even worse, higher taxes do not guarantee to solve inequality or better services. (The health public sector in Chile,1990-2000).
c.- The only tax reforms that matters, is the one which deal with lower taxes. It push spending to focus where it is needed the most.