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Archive for April 26th, 2010

I was going to have a policy-oriented post about the value-added tax or something like that, but I have to complain about government incompetence as it is affecting my life right now.

I’m en route to Ireland for a speech. I started my day in Florida and took a connecting flight to Chicago (where I am right now). The Palm Beach Airport experience was reasonably pleasant, featuring free Internet (yes, I’m willing to utilize services financed by Florida taxpayers).

Chicago is a different story. One of the worst things about being at an airport is going through security, so it is a sign of a terrible airport when you land for a connecting flight and can’t get to your new gate without exiting the secure area and having to go through security again.

If that was the extent of my hassle, I wouldn’t grouse too much, but the geniuses who designed the international terminal at O’Hare didn’t put any restaurants inside security. So after going through security and finding no place to eat, I had to exit to the terminal again.

I’m a cheap bastard, but I paid $6.49 so I could get online and vent my spleen while munching on sub par airport food.

As long as I’m bitching about airport incompetence, I may as well take a shot at Dulles Airport in Washington. I’m vaguely sympathetic to administrators who are running airports that were designed before 9/11 and all the added security hassle. But Dulles recently completed a very expensive renovation, and the system for funneling people into security is even worse than the previous system. I would describe it if I could, but that’s impossible. Suffice to say that people wind up layered next to each other in long lines for each X-ray belt.

In the private sector, people who make bone-headed mistakes suffer consequences. In the government, they get excessive salaries and lavish pensions.

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The politicians are urging big taxes on banks, using rhetoric designed to trick people into thinking that this is a way to make the banks pay for their own bailouts. But a general tax on all banks simply means that well-run banks subsidize the reckless banks – a problem that may get worse over time because of the moral hazard problems that seem to get worse every time politicians get more power over the industry. Greg Mankiw of Harvard has a more appealing idea, which would require automatic conversion of bonds to equity when a bank gets in trouble. This means, for all intents and purposes, that a bank would only be in a position of bailing itself out, so there is no risky cross-subsidization. And since bondholders presumably would not want to be converted into shareholders, there would be greater incentive to monitor whether the bank is being operated in a prudent manner. I’m not an expert on the specifics of the banking system, so I won’t pretend to know enough to give this my unqualified blessing, but I know it is a far better approach than the blank-check bailout/intervention authority in the legislation on Capitol Hill:

There has been much talk about restricting the use of financial derivatives. Unfortunately, writing good rules is not easy. Derivatives, like fire, can lead to disaster if not handled with care, but they can also be used to good effect. Whatever we do, let’s not be overoptimistic about how successful improved oversight will be. The financial system is diverse and vastly complicated. Government regulators will always be outnumbered and underpaid compared with those whose interest it is to circumvent the regulations. Legislators will often be distracted by other priorities. To believe that the government will ever become a reliable watchdog would be a tragic mistake. …Much focus in Washington has been on expanding the government’s authority to step in when a financial institution is near bankruptcy, and to fix the problem before the institution creates a systemic risk. That makes some sense, but creates risks of its own. If federal authorities are responsible for troubled institutions, creditors may view those institutions as safer than they really are. When problems arise, regulators may find it hard to avoid using taxpayer money. The entire financial system might well become, in essence, a group of government-sponsored enterprises. …My favorite proposal is to require banks, and perhaps a broad class of financial institutions, to sell contingent debt that can be converted to equity when a regulator deems that these institutions have insufficient capital. This debt would be a form of preplanned recapitalization in the event of a financial crisis, and the infusion of capital would be with private, rather than taxpayer, funds. Think of it as crisis insurance. Bankers may balk at this proposal, because it would raise the cost of doing business. The buyers of these bonds would need to be compensated for providing this insurance. But this contingent debt would also give bankers an incentive to limit risk by, say, reducing leverage. The safer these financial institutions are, the less likely the contingency would be triggered and the less they would need to pay for this debt.

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Price fixing is illegal in the private sector, but unfortunately there are no rules against schemes by politicians to create oligopolies in order to prop up bad government policy. The latest example comes from the bureaucrats at the International Monetary Fund, who are conspiring with national governments to impose higher taxes and regulations on the banking sector. The pampered bureaucrats at the IMF (who get tax-free salaries while advocating higher taxes on the rest of us) say these policies are needed because of bailouts, yet such an approach would institutionalize moral hazard by exacerbating the government-created problem of “too big to fail.” But what is particularly disturbing about the latest IMF scheme is that the international bureaucracy wants to coerce all nations into imposing high taxes and excessive regulation. The bureaucrats realize that if some nations are allowed to have free markets, jobs and investment would flow to those countries and expose the foolishness of the bad policy being advocated elsewhere by the IMF. Here’s a brief excerpt from a report in the Wall Street Journal:

Mr. Strauss-Kahn said there was broad agreement on the need for consensus and coordination in the reform of the global financial sector. “Even if they don’t follow exactly the same rule, they have to follow rules which will not be in conflict,” he said. He said there were still major differences of opinion on how to proceed, saying that countries whose banking systems didn’t need taxpayer bailouts weren’t willing to impose extra taxation on their banks now, to create a cushion against further financial shocks. …Mr. Strauss-Kahn said the overriding goal was to prevent “regulatory arbitrage”—the migration of banks to places where the burden of tax and regulation is lightest. He said countries with tighter regulation of banks might be able to justify not imposing new taxes.

I’ve been annoyingly repetitious on the importance of making governments compete with each other, largely because the evidence showing that jurisdictional rivalry is a very effective force for good policy around the world. I’ve done videos showing the benefits of tax competition, videos making the economic and moral case for tax havens, and videos exposing the myths and demagoguery of those who want to undermine tax competition. I’ve traveled around the world to fight the international bureaucracies, and even been threatened with arrest for helping low-tax nations resist being bullied by high-tax nations. Simply stated, we need jurisdictional competition so that politicians know that taxpayers can escape fiscal oppression. In the absence of external competition, politicians are like fiscal alcoholics who are unable to resist the temptation to over-tax and over-spend.

This is why the IMF’s new scheme should be resisted. It is not the job of international bureaucracies to interfere with the sovereign right of nations to determine their own tax and regulatory policies. If France and Germany want to adopt statist policies, they should have that right. Heck, Obama wants America to make similar mistakes. But Hong Kong, Switzerland, the Cayman Islands, and other market-oriented jurisdictions should not be coerced into adopting the same misguided policies.

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