World Economy

Apropos of my piece on Ireland’s bubble economy for the _Washington Monthly,_ it does no good thing for a country’s reputation when they start naming tax dodges perfectly legitimate tax avoidance strategies after you.

bq. On advice from Ernst & Young, Forest Laboratories Ireland reorganized that year, dropping the country from its name. The newly dubbed Forest Laboratories Holdings Ltd. established a registered office in Hamilton, Bermuda, declaring the island its tax residence. This unit took control of licensing the patents. A second subsidiary in Ireland inherited the old name. It handled the manufacturing, sublicensing the rights to the patents, according to a corporate disclosure and an internal Forest flow chart tracing the arrangement that was reviewed by Bloomberg. The change helped the Irish subsidiary cut its effective tax rate to 2.4 percent from 10.3 percent the year before the reorganization, according to its annual reports. It did so by deducting from its taxable income the fees that went to Bermuda, which has no corporate income tax. Charlie Perkins, a spokesman for Ernst & Young, one of the so-called Big Four accounting firms, declined to comment on its work for Forest. International tax planners have a nickname for the type of structure the drugmaker adopted: the Double Irish. …

bq. Even though Forest described its Bermuda office as the Irish subsidiary’s “principal place of business” in a 2008 court filing, it has no employees on the island. The closest it comes to an actual presence is its registered office at Milner House, at 18 Parliament Street in Hamilton, a beige building nestled among the pastel structures of the island’s main commercial area. There, Coson Corporate Services Limited, part of law firm Cox Hallett Wilkinson, provides “corporate administrative services” for Forest Laboratories Holdings, according to Jeannette Monk, who identified herself as the company’s corporate administrator. Asked whether Forest had any employees there, she said, “This is a law firm.”

But perhaps “Double Dutch” would be better …

bq. To avoid another Irish tax, Forest’s profits don’t fly direct to Bermuda. They have a layover in Amsterdam. Fees paid to the Bermuda unit pass through yet another subsidiary, Forest Finance BV in the Netherlands, according to the internal Forest document, Dutch corporate records and a person familiar with the transaction. That route bypasses a 20 percent Irish withholding tax on certain royalties for patents, according to Richard Murphy, a U.K. accountant who worked on similar transactions and is director of Tax Research LLP. The structure takes advantage of an exemption from the levy if payments go to a company in another EU member state, Murphy said.

A really good article from Bloomberg – go and read it.

I’m grateful to commenters Lemuel Pitkin and Bill Gardner, who pointed me towards Rodrik’s trilemma the other day. In his latest Project Syndicate piece, Rodrik represents the trilemma thus:

bq. economic globalization, political democracy, and the nation-state are mutually irreconcilable. We can have at most two at one time. Democracy is compatible with national sovereignty only if we restrict globalization. If we push for globalization while retaining the nation-state, we must jettison democracy. And if we want democracy along with globalization, we must shove the nation-state aside and strive for greater international governance.

Possibly for pedantic reasons, I’m not all that happy with this formulation. After all, national sovereignty is pre-eminently a legal concept and democracy might be defined merely in procedural terms, and it isn’t at all obvious why regular elections, legal sovereignty and globalization would be incompatible in the way Rodrik suggests. However, there’s a more careful version in his 2000 paper “How far will international economic integration go?” (J. Econ Perspectives 14:1) where the trilemma is expressed as being between international economic integration, the nation state, and “mass politics”, where the latter refers to

bq. political systems where: a) the franchise is unrestricted; b) there is a high degree of political mobilization; and c) political institutions are responsive to moblized groups. (p.180)

In the 2000 article, Rodrik discusses Friedman’s “Golden Straitjacket” where “mass politics” is the disappearing bit:

bq. the shrinkage of politics would get reflected in the insulation of economic policy-making bodies (central banks, fiscal authorities, and so on) from political participation and debate …. (p. 183)

Cue Stephanie Flanders on the UK’s new Office for Budget Responsibility.

I was talking to a friend in the trade policy world this weekend, who told me that he understands that Canada will indeed be taking a WTO action seeking remedy for the EU’s ban on the importation of seal products, imposed because of the perceived cruelty of clubbing baby seals to death so as to get their skins off intact. Apart from the innate merits of the underlying argument (which you can discuss in comments to your heart’s content), this should (unless Stephen Harper loses his job in the meantime and the new government loses interest) really, really have some interesting effects on debates over world trade and globalization. Screw the turtles – when anti-WTO protest groups are able to run full page newspaper ads with adorable baby seal cubs, they’re going to be in a truly excellent position to wage public relations war. All the more so when the Canadian counterposition (that the seals are killed humanely) turns on the legal requirement that the baby seals should have stopped blinking before the hunters start skinning them. Perhaps Stephen Harper should have applied similar attention to the current state of the Doha round – I don’t see it moving around very much at the moment, but it does still blink occasionally. I wouldn’t be surprised if this turns out to be the _coup de grace_ for trade liberalization this decade and the next (which does not, of course, mean that it would be the most important explanatory factor if trade liberalization grinds to a halt, merely one of the significant immediate causes).

The _Financial Times_ isn’t the leftiest of newspapers, but it is hard to argue with their verdict on the European Parliament elections:

The centre-right held its ground or advanced, both where it is in power and where it is in opposition. The mainstream left was decimated. This election shows that the social democratic parties have lost the will to govern. At a time when “the end of capitalism” is raised as a serious prospect, the parties whose historical mission was to replace capitalism with socialism offer no governing philosophy. Their anti-crisis policies are barely distinguishable from those of their rivals. The leadership crisis in several European socialist parties suggests their outdated ideas are matched by oversized egos.

Greens triumphed where the traditional left failed. Daniel Cohn-Bendit, who knows a thing or two about critiques of capitalism, appealed to voters willing to consider fundamental social change. As one of few groups to fight on pan-European issues, the Greens also proved that not all voters are deaf to Europe-wide politics. But the crisis has most benefited the strand of the European right that was never against regulating the market economy. By arguing that the crisis is a result of excessive “Anglo-Saxon” policies, centre-right parties have presented themselves as the most trustworthy stewards of a safer, European-style capitalism. Voters agreed.

My own take on the failures of European social democracy a few months ago was more or less identical. I’d love to be convinced that I was wrong though. Or, in the absence of a compelling counter-claim, at least get a better sense of why European social democratic parties have become empty shells. One first-approximation guess is that this had to do with the largely successful efforts by social democrat ‘reformers’ to replace the old anti-capitalist ideas and language with more market-friendly stuff, which succeeded just in time to leave these parties completely unprepared to deal with the demise of actually existing capitalism. A second is that current day social democrats are much less able than their 1930s-1950s predecessors to meld nationalism and market constraints. Other possible explanations?

This FT article is the best piece I’ve seen on the intra-Europe battles over ECB policy, but it could go deeper still.

When Angela Merkel ended a long and otherwise unremarkable speech about economic policy this week with a vitriolic attack on the world’s three mightiest central banks, the German chancellor was writing a minor chapter of her country’s political history. No previous chancellor had dared attack their, and others’, central banks so frontally – saying the US Federal Reserve, Bank of England and European Central Bank should all row back on their unconventional recent ways of propping up economies. …

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Matthew Yglesias does Martin Feldstein a serious injustice.

Feldstein’s characterization of the bill isn’t really correct and some of his economic analysis is debatable. But beyond that, the key point on which Feldstein’s argument turns actually has nothing whatsoever to do with economics. … Feldstein’s hypothesis … is clearly a proposition about _international relations_ … Presumably the reason the Post is interested in Feldstein is his expertise in economics. So there’s no reason for them to be running an op-ed whose key contention has nothing to do with economics.

Matt is clearly unaware of Feldstein’s distinguished record as a theorist of international relations (this may not be as distinguished as his research record on the relationship between Social Security and savings, but you can only do what you can do). Feldstein is particularly famous (well, famous is one way of putting it), for his suggestion in a 1997 Foreign Affairs article that the introduction of the euro might lead to a civil war that would tear Europe apart.

War within Europe itself would be abhorrent but not impossible. The conflicts over economic policies and interference with national sovereignty could reinforce long-standing animosities based on history, nationality, and religion. Germany’s assertion that it needs to be contained in a larger European political entity is itself a warning. Would such a structure contain Germany, or tempt it to exercise hegemonic leadership?

A critical feature of the EU in general and EMU in particular is that there is no legitimate way for a member to withdraw. This is a marriage made in heaven that must last forever. But if countries discover that the shift to a single currency is hurting their economies and that the new political arrangements also are not to their liking, some of them will want to leave. The majority may not look kindly on secession, either out of economic self-interest or a more general concern about the stability of the entire union. The American experience with the secession of the South may contain some lessons about the danger of a treaty or constitution that has no exits.

The carpers and the hurlers on the ditch might complain that Jean-Yves Reb hasn’t reached for his rifle in the intervening ten years, and doesn’t look like he’s going to anytime in the foreseeable future. But that would be to miss the point that Feldstein’s contribution spurred much spirited discussion among international relations scholars, and specialists on the European Union (most of it not very complimentary to Professor Feldstein, but again, you can only do what you can do).

I’m working on a bunch of essays, book chapters and maybe even a book or two in response to the global financial crisis, making the general point that the sudden collapse of the neoliberal order has found social democrats unprepared for the shift from a long defensive struggle to the opportunity (and need!) to develop a progressive response to the crisis. As obvious examples, it’s necessary to reconstruct the global financial system and to ensure that the burden of the debts that are building up so rapidly is not borne by the poor, who did nothing to create the crisis. This piece (PDF) is an example of what I’m thinking.

I have plenty of ideas about policy (though of course I’m always interested in new ones). But, I don’t have much of a feeling for the political strategies that are needed, so I thought I would try the crowdsourcing thing, which has worked pretty well for me in the past.

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[Stolen wholesale from The Irish Economy, a very interesting blog, which I recommend to you all].

The last time the world experienced an economic catastrophe on the present scale, governments in Latin America and elsewhere drew the conclusion that reliance on fickle overseas markets was a dangerous thing. World War II only served to reinforce this conclusion.

Similar lessons are being drawn today, with one crucial difference. Back then, the decision was made to artificially decouple national economies from the international economy by developing protected industries that would service the home market. Now, the focus is on lessening export dependence by boosting local demand, which will involve temporary stimulus measures in the short run, but more structural measures in the longer term, for example promoting “social safety nets to give Asian consumers, especially the poor, the confidence to spend”. Moving towards higher wages, a more equal income distribution, and lower savings rates in countries like China, so that more of what is produced there is consumed there, would seem to be among the more benign adjustment scenarios available to the world economy today.

From the Irish Times today …

IRELAND IS set for the sharpest fall in economic growth experienced by an industrialised country since the Great Depression, the Economic and Social Research Institute (ESRI) says in a report published today. The institute’s spring quarterly economic commentary estimates that gross national product will fall by 9.2 per cent this year. “Our forecasts suggest that Ireland’s economy will contract by around 14 per cent over the three years 2008 to 2010. By historic and international standards this is a truly dramatic development. “Prior to this the largest decline for an industrialised country since the 1930s had been in Finland, where real gross domestic product declined by 11 per cent between 1990 and 1993,” according to the ESRI.

I’m not particularly keen on the current Irish government, but this seems a bit much:

Ireland may need “new faces in Government”, an analyst with debt ratings agency Standard & Poors said this morning. Frank Gill, speaking a day after the agency lowered Ireland’s credit rating, also said Ireland had a “very low” chance of defaulting on its debt during an interview with Newstalk radio this morning. Mr Gill said a change of Government may be required in an effort to stabilise the debt to gross domestic product ratio. That ratio may rise to above 9.5 per cent, according to the Government, more than three times the European Union limit. Ireland has lost its prized “AAA” credit rating from Standard & Poor’s, which yesterday downgraded its outlook for the Irish economy, blaming the deterioration in public finances. In a move that will make the cost of Government borrowing more expensive and put further pressure on the economy, Standard & Poor’s lowered Ireland’s rating from AAA, the top rating possible, to AA+.

I wouldn’t have thought that this was an especially opportune moment for credit rating agencies to start throwing their weight around given their major contribution to the ongoing crisis, but even in normal times, this would have struck me as serious over-reach. Credit rating agencies are purely private bodies, with an awful lot of political power. In theory, they impartially pronounce upon the perceived riskiness of lending to particular debtors, putting money in particular deals and so on. In practice, their decisions often prove to be quite political. But rarely as political as this. I don’t think that this comment can be interpreted as anything but a statement that Standard and Poor’s willingness to improve Ireland’s credit rating is dependent on the Irish Dail and Irish voters kicking the current government out. That’s a very dubious – and very political – action for a purportedly neutral and technical body to be taking.

Update: Thanks to nnyhav in comments for pointing to this later story.

Reacting to S&P’s decision to cut the Republic’s rating, economists and market analysts yesterday homed in on its concern that there would not be a credible plan for the public finances until after the next election. Mr Gill told The Irish Times that the statement was not meant to question the State’s leadership, and simply reflected the challenge facing the Government and the uncertainty surrounding the banks. He also stressed that a AA+ rating was still broadly positive. “That is a very high rating and this suggests an extremely low probability of default,” he said.

I originally thought that this looked like a walkback rather than a clarification and said as such – then I saw that the Irish Times had changed their original story (without saying that they were doing this) to include the full quote which appears considerably more ambiguous than the original story implied.

Mr Gill said a change of Government may be required in an effort to stabilise the debt to gross domestic product ratio.

“It’s likely that for there to be a buy in into what are going to be inevitable tax hikes in order to stabilise the debt to GDP ratio, you are going to need new faces in the Government. This is typically the case in the aftermath of an economic crisis,” Mr Gill said

The GDP ratio may rise to above 9.5 per cent, according to the Government, more than three times the European Union limit.

CLYTAEMNESTRA
Citizens of Argos, you Elders present here, I shall not be ashamed to confess in your presence my fondness for my CEO, billions of dollars of losses notwithstanding.

First and foremost, it is a terrible evil for a wife to sit forlorn at one of her several homes, severed from her husband, always hearing many malignant rumors, and for one messenger after another to come bearing tidings of disaster, each worse than the last, and cry them to the household. Because of such malignant tales as these, many times others have had to loose the high-hung halter from my neck, held in its strong grip. It is for this reason, in fact, that our boy, Timmy, does not stand here beside me, as he should. For he is in the protecting care of well-intentioned taxpayers, who warned me of trouble on two scores—your own peril beneath Ilium’s walls, and then the chance that the people in clamorous revolt might nationalize everything, as it is natural for men to trample all the more upon the fallen. Truly such an excuse supports no guile.

CASSANDRA
Are you sure you should be paying out this money?

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The Labor Beat video group is putting together a documentary about the victorious occupation of the Republic Windows and Doors factory in Chicago. The filmmakers were — unless I’m mistaken — the only media group given constant access to the inside of the factory during this action. They’ve put up a ten minute selection of footage on YouTube:

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Dani Rodrik had a provocative blogpost a little while back:

Here is the dilemma we cannot evade. If we want a truly global financial system, we need to acquiesce in a global regulator and a global lender of last resort. If we do not want the latter, we cannot have an integrated global financial system, so we must acquiesce in–gasp!–capital controls.

The counterargument that I’ve been hearing from people (well, one significant person anyway) involved in the Obama transition process is twofold. First – that it would take far too long to create any global regulatory structure, given differences in national level regulatory schemes. Second, that we don’t need any binding global regulations anyway, and that everything we need to do can be done through dialogue between the national regulators that already exist. Maybe the best way to think this through is to look at the best example that we have of a transnational regulatory system with teeth – the European Union.

The EU’s experience reinforces the claim that it is really difficult to get national regulatory systems to play nicely with each other, and it is _especially_ difficult to get them to play nicely in the realm of banking and financial system regulation, because these regulations are (a) really important, (b) reflect genuinely different national priorities and banking systems, and (c ) also reflect the desires of strongly embedded interest groups in the national systems that like things the way they are (the Italian central bank, for example, is effectively beholden to a number of national banks inside and outside the _salotto buono_ and unsurprisingly these national banks want to keep the current system unchanged).

However, it also provides strong evidence of the problems of weak regulation. One of the major reasons why the European financial system is finding it hard to cope is exactly the lack of a Europe level regulatory backstop and lender of last resort, that could deal with banks that are effectively playing in a Europe-wide (if not worldwide) market. National governments are trying to do what they can, but their efforts are sometimes pretty wobbly. And the EU experience completely belies the claim that regulatory dialogues are a good substitute for comprehensive supranational regulation. If there is one thing that Europe does to a fault, it’s regulatory dialogues. But they do diddly-squat to stop countries defecting when they are in hard situations (e.g. the Irish offer to guarantee bank deposits when its credibility came under attack, Germany’s follow-up behaviour etc). This isn’t to say that one can easily create a global regulator with teeth and genuinely binding regulatory power – building one would be somewhere between very difficult and effectively impossible. It is to say that Rodrik’s conundrum is a real one – and the claim that governments can muddle through with a little more coordination and talk among themselves is almost certainly wishful thinking.