Ülo Ennuste Economics

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Another Memo (*)

Another Macro-Memo (*)

This Memo is theoretically very much initiated by Christopher Cotton paper in spe  (**) and specifically by the following claims considered there:

„(1) the rich have better access to politicians than less-wealthy groups, (2) this access advantage makes the rich better off and skews policy in their favor, and (3) contribution limits can reduce the rich group advantage and result in less-skewed policy. … , which results in more evidence disclosure and better policy.”

Let us add here claims that from the modern heterodox macroeconomics position probably (1) “the rich” (tycoons, oligarchs, magnates, CEOs especially of banks etc, VIPs, etc or dependent think tanks etc – from macroeconomics point generally “laisser faire” and “small government” parlour) have also better access e.g. to national public press and formation of national public socio-economic knowledge space, and (2) from the point of political economics these access advantages probably are skewing national economic policies and national socio-economic knowledge structures in favour of certain interest groups, and (3) most probably are skewing national macroeconomics knowledge structures in favour to the direction sub-optimal short-termism and to  preference of the myopic microeconomics outdated market concepts and objectives in long-term development projections, e.g.: short-term growth v. sustainability, laisser faire v. taxes and audition, GDP v. NNI, stimulation v. intervention, forecasting v. projections, horizontal coordination v. hierarchical, competitiveness v. wellbeing, consolidation v. expansion, unemployment v.  employment and fair economic equality, populist growth indicators v. economic potential, and so on – in directions of bad policies first of all from  the coordinated economic wellbeing union central player’s long-term views with primary priorities like convergence, sustainability, employment, alleviation of poverty etc.

For the empirical illustrations of the probable skewness in favour to haves and probably in incompetent short-termism and obviously on the contrary with economic union central coordinating player interests – in the national economic policy projections – let us take a section from the Estonian Government recent projection by 2020 (*** pp 29-30):

17. Continuing the gradual reduction of taxes on labour and profits and to increase taxes on consumption and use of natural resources.

Greater taxation of wages and profit will limit economic growth more than the equivalent amount of taxation on consumption and use of the environment. For this reason, we must support at every level a shift in taxation from workforce (direct taxes) to taxation of  consumption and resource use (indirect taxes). Besides geographic location and reputation of the state, taxation is one of the most important factors that helps draw foreign direct investment to the country. Favourable taxes are the linchpin for positive investment decisions in cases where other prerequisites (basic infrastructure, education, security) are ensured to a degree comparable with other countries. Thus, as one measure to be established, a ceiling will be set on the pension insurance component of the social tax.

Efforts must be continued to harmonize indirect taxes that have a significant impact on the functioning of the EU internal market and to abolish exceptions in the EU. Direct taxes and tax systems (rates) reflect every country’s specific and unique social and political choices, and thus the principle of freedom of choice of member states must remain in place in this regard.

Estonia must become the 28th tax system to support the uniform consolidated income tax base on condition that it will simplify the functioning of the entrepreneurial environment and that it is possible to maintain the current Estonian corporate income tax principles. Simplicity, transparency, low administrative costs are of key importance for Estonia in maintaining and increasing the competitiveness of the entrepreneurial environment.“

It is easy for us to see – by all standards of modern heterodox macroeconomics (synthesis of the evolutionary-, institutional-, Bayesian- etc macro theories e.g. Keynesian and Friedmanian doctrines etc) –  this section is completely skewed towards the interests of the richer Estonian stakeholders and this especially in the EU long-term context,  and based on first of all on myopic microeconomic  and populist outdated concepts e.g.:

Continuing the gradual reduction of taxes on … profits (sic! üe) and to increase taxes on consumption … “ –  a) profit tax in Estonia has been  already about dozen years annulled to zero (sic!) and so an absurdity in the macroeconomic context: unethical and not harmonized in the international competition on capital markets, and dysfunctional domestically as pushing capital out of domestic economy (http://statistika.eestipank.ee/?lng=et#listMenu/1232/treeMenu/MAKSEBIL_JA_INVPOS/145/436 ) and unfairly inflicting increasing labour taxes and inflation, and b) increase of taxes on consumption would first of all be hitting most severely population in poverty risk and material deprivation c) and this tax policy is macro economically almost certainly not sustainable as e.g. indirectly is stimulating outflows of capital and labour out of country, increasing domestic economic real inequality etc – and with great probability inflicting sub-optimal long-term development of the national economy.

And: “Estonia must become the 28th tax system to support the uniform consolidated income tax base on condition that it will simplify the functioning of the entrepreneurial environment and that it is possible to maintain the current Estonian corporate income tax principles.” – this statement is not only skewed but also logically fuzzy in the interests  investors and trying to perpetuate that the less-wealthy should pay for some public expenses connected with profit-making of the haves.

Most importantly:  the present current populist macroeconomic policy on the basis of distorted low quality national public knowledge space (dominated by myopic populist liberal microeconomics doctrines as “flat taxes and small government” and “domestic devaluation”) has in the recent years turned Estonian economy on the negative divergence trend in the EU27  comparison (see *** Figure 1. p 3: Estonian GDP pc even in the decorative PPS currency in sigma convergence has taken downwards trend), and NB! there is a regrettable Figure 1. but myopically no word of responsible explanation about this significant dismal trend in this documet. Probably a turn to un-sustainability has also taken place (recall as unbalanced amounts of capital and labour is flowing out of the domestic economy) –  and that all regardless of substantial grants from the EU budget. Probably the neglect to analyse   these most important negative tendencies become possible because in the Estonian administrative statistics lacks a clear-cut rubric like “Sustainabilty indicators”.

Most importantly: Projections like “Estonia 2020″, Europe 2020” etc, and clusters of official statistical sustainability indicators must also contain information about macro-financial flows and stocks, human capital macro flows and stocks, FDI flows and stocks, different inflation indicators, relevant tax reforms time lines, poverty indicators etc.

 Deus ex machina: it seems the ESM should first of all in the periphery Member Countries limit the implementation of bad policies mechanisms due to incompetent governance based on     low quality  public socio-economic knowledge space. As it seems obviously some “small” governments of these Member Countries have also not enough political bargaining power for the rational implementation of knowledge based policies and reforms for sustainable development.

 In this respect the central role in the ESM should have the “European Semester” mechanism (see e.g. **** p 9) in the process of giving strategic guidance on policies to the Member States when preparing their Stability and Convergence Programmes and National Reform Programmes. It may be claimed that this mechanism has been designed according to modern standards of the heterodox mainstream macroeconomics (especially Bayesian informational coordination mechanism with side-payments theories). But as such may be skewed and in conceptual conflict with most of peripheral Member States  national socio-economic managers and administrators interests and of  international banks and monopoles local interests (high inflation, tax paradise, low wages ect), and most importantly in  contradiction of the national public knowledge spaces mainly formatted on autdated liberal microeconomics tenets.

Probably this information asymmetry phenomenon may hamper or already had impeded the optimal implementation of the European Semester coordinating game mechanisms – and perhaps something has to be urgently done/regulated first of all  in this mechanism  by Commission especially in the field of enhancing quality of macro  communication mechanisms and  improving quality of  national macro statistics (e.g. include sustainability indicators etc; and publish Member Countries comparative GDP growth rates – http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-15022012-AP/EN/2-15022012-AP-EN.PDF – i.e. not with  */**/***  indications; BTW these kind fuzzy tables may inflict serious confusions internationally – e.g. in http://www.whitehouse.gov/sites/default/files/docs/erp_2012_complete.pdf is Estonian GDP 2012 growth rate overestimated etc) and introducing additional statistical and forecasting indicators into Commission knowledge structures – to harmonize the qualities of the central and local knowledge structures and coordination effectiveness (see also e.g. *****).

*******************************************************************

(*) Previous Memo in this personal macroeconomics lobbing see: Ennuste, Ü. 2009. Memo to the Prime Minister of Estonia and the Commissioner of Economic and Monetary Affairs: https://uloennuste.wordpress.com/2009/09/23/memo-23-ix-09/  BTW the Department of Economic and Monetary Affairs has given an approving reflection. In this case there will be at least one more addressee: http://ec.europa.eu/public_contracts/index_en.htm        

(**) Christopher Cotton. 2012. „Pay-to-play politics: Informational lobbying and contribution limits when Money buys Access“  Journal of Public Economics Volume 96, Issues 3–4, April 2012, Pages 369–386 (in Press).

Abstract

We develop a game theoretic model of informational lobbying between two interest groups and a politician, in which the politician can require political contributions in exchange for access. The analysis considers three claims: (1) the rich have better access to politicians than less-wealthy groups, (2) this access advantage makes the rich better off and skews policy in their favor, and (3) contribution limits can reduce the rich group advantage and result in less-skewed policy. We show that the rich do have better access, with the politician always offering access to the rich groups and only sometimes offering access to the less-wealthy group. This does not, however, mean that the rich group is better off or that policy is biased in its favor. The politician sets access fees to extract the greatest amount of rent from the political process. When only the rich group has access, its expected benefit from gaining access is fully offset by its payment to the politician. In this case, the less-wealthy interest group who is not targeted by the politician is better off. Contribution limits decrease the politician’s ability to extract rent, which improves the payoffs of rich interests and decreases politician payoffs. Finally, the paper presents a novel benefit of contribution limits: they can encourage the formation of lobby groups or the search for evidence, which results in more evidence disclosure and better policy.

NB: on the measurement of informational/policy skewness on the complex pain see e.g. Ennuste, Ü. 2007 September. The Speech: http://www.audentes.eu/public/Ennuste_Speech.pdf

And on the institutional  equlibrium also the Paper:

DP8855 A Model of Equilibrium Institutions

URL: http://www.cepr.org/pubs/new-dps/dplist.asp?dpno=8855.asp

Author(s): Bernardo Guimarães, Kevin D. Sheedy

Date of Publication: February 2012

Keyword(s): institutions, political economy, power struggle, property rights, time inconsistency

Abstract

 Institutions that serve the interests of an elite are often cited as an important reason for poor economic performance. This paper builds a model of institutions that allocate resources and power to maximize the payoff of an elite, but where any group that exerts sufficient fighting effort can launch a rebellion that destroys the existing institutions. The rebels are then able to establish new institutions as a new elite, which will similarly face threats of rebellion. The paper analyses the economic consequences of the institutions that emerge as the equilibrium of this struggle for power. High levels of economic activity depend on protecting private property from expropriation, but the model predicts this can only be achieved if power is not as concentrated as the elite would like it to be, ex post. Power sharing endogenously enables the elite to act as a government committed to property rights, which would otherwise be time inconsistent. But sharing power entails sharing rents, so in equilibrium power is too concentrated, leading to inefficiently low investment.

(***) http://ec.europa.eu/europe2020/pdf/nrp/nrp_estonia_en.pdf  – National Reform Programme “ESTONIA 2020” (approved by the Government on 28 April 2011)

NB: the trouble with the Paper is that the game is uncoordinated and so  the equilibrium probably sub-optimal (see also: Ennuste, Ü. 2003. A Linear Planning Analysis of Institutional Structure in the Economy. In: Ülo Ennuste and Lisa Wilder (eds.) Essays in Estonian Transformation Economics. Tallinn, 2265-279:http://pdc.ceu.hu/archive/00001564/01/linear.PDF )

 (****) EUROPEAN COMMISSION COM(2010) 250 final: COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS

 

P 9: “ … A European Semester should encapsulate the surveillance cycle of budgetary and structural policies.

It would start early in the year with a horizontal review under which the

European Council, based on analytical input from the Commission, would identify the main

economic challenges facing the EU and the euro area and give strategic guidance on policies.

Member States would take conclusions of this horizontal discussion into account when

preparing their Stability and Convergence Programmes (SCPs) and National Reform

Programmes (NRPs). SCPs and NRPs would be issued simultaneously, allowing the growth

and fiscal impact of reforms to be reflected in the budgetary strategy and targets. Member

States would also be encouraged, in full respect of national rules and procedures, to involve

their national parliaments in this process before submission of the SCPs and NRPs for

multilateral surveillance at the EU-level. The Council, based on the Commission’s assessment,

would subsequently provide its assessment and guidance at a time when important budgetary

decisions were still in a preparatory phase at the national level. In this context, the European

Parliament should be appropriately engaged. … “

(*****) Changchen, L. and Yunfeng, L. 2010. Perfect Bayesian implementation when the planner is a player. – Journal of Mathematical Economics, 46 (2010) 400–404.

And

 Ennuste, Ü. 2008. „Synthetic Conceptions of Implementing Mechanisms Design for Public Socio-Economic Information Structure: Illustrative Estonian Examples“  In: Socio-economic and institutional environment: harmonisation in the EU countries of Baltic Sea Rim. Institute for European Studies, Tallinn: Tallinn University of Technology, 9 –39:  http://www.ies.ee/iesp/No4/Ennuste.pdf  

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February 7, 2012 - Posted by | Uncategorized

3 Comments »

  1. Ehkki ingliskeelne tekst, vbla võib siiski eesti keeles kommida..
    Otseste ja kaudsete maksude teemast jätkates – kui kunagi maa hinda ja maamaksu tehtud sai, siis oli idee et see peaks olema igal juhul tsentraalne maks ja allikas regionaalpoliitikaks. Maa hinnas põhifaktor on asukoht ja see ei ole maa omaniku tehtud. Seetõttu on õigustatud asukohast tuleneva tulu maksustamine ja ümberjagamine.
    Esmalt leidsid riigikogujad, et eraldi fondi küll teha ei tohi, kõik rahad peavad liikuma läbi riigieelarve ühe katla ja riigikogujatel peab olema võimalus kogu potti ümber suunata vastavalt vajadusele. Järgmiseks ärkas Tallinn ja leidis et Tallinna makse ei saa küll vabariigi peale laiali määrida ning pressiti peale 50/50 jaotus riik vs KOV. Väiksema ajupotentsiaaliga maavaldade esindajad ei jaganud matsu välja ja kisasid kaasa et parem pool muna (pool maksu vallale) kui tühi koor (kogu maks riigile).
    Ei taha kommenteerida seda, et tänaseni maamaksu alus 2001 hindamine. Kuid otsese kinnisvaramaksu juurutamisele olen küll vastu.

    Comment by Ain Kendra | February 11, 2012 | Reply

    • kompleks küsimus kuid selle kohta palju kirjutatud – vt nt

      Journal of Public Economics
      Volume 42, Issue 2, July 1990, Pages 195–211
      Economic effects of landtaxes in an inflationary economy
      Toshihiro Ihori∗
      Faculty of Economics, Osaka University, Toyonaka, Osaka, 560 Japan
      Available online 5 March 2002.
      http://dx.doi.org/10.1016/0047-2727(90)90012-7, How to Cite or Link Using DOI
      Permissions & Reprints
      Abstract
      We investigate the incidence of landtaxes using a monetary overlapping generations model. The real price of land may be raised with a landtax even when the elasticity of saving with respect to the interest rate is positive. We may have the ‘crowding-out’ case, which is induced by the substitution from capital and land to money. The capital loss suffered by older generations holding land during the transition to a landtax may be partially offset by a gain in money balances as inflation abates.


      This research was supported in part by the Tokyo Center of Economic Research and the 21 Century Foundation. I thank the referee for helpful comments.
      Copyright © 1990 Published by Elsevier B.V.

      PS: hästi ei saa aru kuidas maa hind ei sõltu omanikust – nt üks pollitik isegi murdis jala linnukesi toites – linnukesed aga tõstavad miljööväärtust – see aga tõstab krundi hinda

      Comment by Ülo Ennuste | February 12, 2012 | Reply

  2. […] grante kärpida vm) – millised jamad täpsemalt ja millistel põhjustel  (vt nt laiemalt https://uloennuste.wordpress.com/2012/02/07/draft-7-ii-12-please-comment-another-memo/) – seda oleks pidanud juba aastaid tagasi Riik hakkama arutama (vt nt […]

    Pingback by Makro-sõpradele « Ülo Ennuste majandusartiklid | February 14, 2012 | Reply


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