In comments at my personal blog, James Wimberley asked about the recent agreement on a 15 per cent global minimum rate of tax. Over the fold, a section from my book-in-progress (still a bit rough in places), Economic Consequences of the Pandemic addressing this and other points
. Comments and criticism appreciated.In the 1980s and 1990s, the financialisation of the economy was viewed in triumphalist terms. Terms like ‘Masters of the Universe’ and ‘The Thundering Herd’ reflected the view of financial markets as not merely beneficent but irresistible and indestructible
All of that came to a crashing end in September 2008 when the failure of Lehman Brothers brought the entire financial system to the brink of collapse. Hundreds of securities that had been rated as AAA were shown to be worthless
But the general loss of faith in financial markets had little impact on their actual operations. Hardly anyone in the system faced any serious consequences. [Fn: the complete impunity of Wall Street contrasts sharply with the aftermath of the financial collapse in Iceland where a dozen or more senior bankers were sent to prison]
The divide became even wider in the years following the crisis. Having escaped any consequences for nearly destroying the world economy, the financial sector was, if anything emboldened. A steady sequence of scandals showed them engaged in everything from market-rigging to tax evasion to the provision of finance for terrorists and drug dealers [fn A partial list, which readers are invited to explore includes LIBOR, Panama Papers, cum-ex, Forex, UBS tax evasion, Deutsche Bank money laundering, Credit Suisse spying and many more). In every case, the response of regulators was the same. The banks paid a financial penalty representing a small proportion of the profits their manipulations had generated, and were told that next time there would be really consequences. Eventually, one Swiss bank was forced to close for its role in US tax evasion [Wegelin was the oldest bank in Switzerland, but apart from that was of little significance].
All of this undermined the political strength financial sector. In the heyday of financialised capitalism, the financial sector enjoyed bipartisan political support and a fair degee of popular enthusiasm. Financial professionals and firms donated both to Democrats, whose social liberalism they largely shared and to Republicans, whose willingness to hand out big tax cuts they appreciated.
The first step was the Occupy Wall Street movement which erupted in 2011. Although the movement ultimately faded away, it marked a sharp break between the left, including the left wing of the Democratic party and the financial sector. Democrats with close ties to the sector, such as Senator Chuck Schumbers came under increasing pressure to justify their position.
Republicans, most notably Donald Trump, combined rhetorical denunciations of Wall Street with highly favorable policies, including tax cuts and the removal of regulatory constraints. Most notably, while he promised to ‘drain the swamp’ by breaking up the banks with a new version of the Glass-Steagall Act, in reality he did nothing of the kind.
The result was that, by the time the pandemic hit, Wall Street was as profitable and politically influential as it had ever been, but commanded almost no public support. Both Democratic and Republican voters (as well as independents) supported stronger regulation
https://www.vox.com/policy-and-politics/2019/10/7/20898512/poll-democratic-republican-wall-street-regulation
This is an inherently unstable situation. The power of the financial sector cannot, in the end, co-exist with democracy. While finance is essential, it should be subordinate to the needs of productive economic activity, and not the primary driver.
The pandemic has further exposed the dependence of financial markets on public suppot. As the severity of pandemic became evident in February and March 2020, stockmarkets plunged. It was only when the Federal Reserve stepped with massive purchases of securities and injections of liquidity that markets recovered.
The availability of easy money has led to a surge in speculation. Much of this has occurred on the fringes of official financial markets in such ventures as ‘Initial Coin Offerings’ for cryptocurrencies. However, mainstream financial markets have produced similar speculative
most notably in the form of “special purpose acquisition companies” (SPACs)
Although the name SPACs is new, the concept is not. A speculative boom in Australia in the 1980s saw the emergence of hundreds of ‘cashbox’ companies, which were created solely for the purpose of acquiring other companies Those that survived the sharemarket crash of 1987 were killed off by a financial crisis. Subsequent regulations prohibited the listing of companies with more than half their assets in cash https://smallcaps.com.au/spacs-australian-cash-boxes-were-ahead-of-their-time/
In one form or another, speculative vehicles like the SPAC can be traced back to the first experiment with joint-stock corporations in 18th-Century England, which gave rise to the “South Sea Bubble”. Among many dubious corporations created in this mania was, it is said, “a company for carrying on an undertaking of great advantage, but nobody to know what it is”
Although they have benefitted greatly from government supporrt, financial markets have made little if any contribution to solving the problems created by the pandemic. Programs like mortgage relief have been legislated by Congess.
What can be done to curb the power of financial markets. Both governments and civil society have a role to play.
Much of the profitability of the corporate sector derives from socially undesirable activities such as tax avoidance. Progress against tax avoidance and evasion has been grindingly slow, but real nonetheless.
As a result tax evasion by wealthy individuals using offshore accounts has become more difficult and risky. The famous Swiss bank account, wiht guaranteed anonymity, ceased to exist in 2018 when Switzerland began officially sharing bank account data with tax authorities in othe countries.
The leak of the Panama Papers detailing offshore arrangements amnaged by law firm Mossack Fonseca showed the extent of evasion, but also accelerated the push against it. Overriding a Trump veto in 2021, Congress passed the Corporate Transparency Act, which requires large numbers of businesses to disclose their true ownership
On the corporate front, colorfully named maneuvers like the “Double Irish” and “Dutch Sandwich” were used by US corporations to shift profits from the countries where they were earned, inlcuding the US into low-tax European jurisdictions and then to tax havens in the Caribbean and elsewhere. The OECD has moved against these also, under the more prosaic terminology of Base Erosion and Profit Shifting (BEPS). A long series of negotiations have gradually squeezed out the most egregious practices.
https://www.theguardian.com/politics/2021/sep/06/european-banks-storing-20bn-a-year-in-tax-havens
These measures have had some limited effect. In the years leading up to the Global Financial Crisis, financial corporations accounted for nearly 40 per cent of all corporate profits. After the Crisis, the finance share of profits rapidly recover. However, this recovery has been limited. The finance sector share of profits is now about 25 per cent, still well above the levels of the 20th century, but below those of the bubble economy that ran from the 1990s to the GFC.
It is unclear how much of this is due to tighter regulation. Steady improvements in technology might have been expected to drive a contraction in the financial sector, and a reduction in margins between borrowing and lending rates. However, there is not much evidence of this. Another possibility, discussed below, is that the information monopolies that now lead the growth in corporate profitability have little need for investment and therefoe less reliance on financial markets.
What can be done to return the financial sector to its appropriate and limited role of an intermediary between savers (mostly households) and borrowers (homebuyers and business investors). Both governments and activism by civil society have a role to play.
Activism can seek to push the financial sector towards encouraging more socially desirable forms of investment. Perhaps the biggest successes have been seen in campaigns to force finance sector firms to divest from coal, oil and gas in line with the need to decarbonize the global economy. The campaign began with small-scale successes, persuading universities, churches and charitable organizations to divest, but these symbolic measures did little to reduce the availability of finance for carbon-based fuels.
The broader campaign for divestment faced determined resistance from the finance sector. Proposals for divestment put forward at shareholder meetings were routinely defeated, typically with institutional shareholdes like pension funds lining up with company boards in opposition. But as it became evident that decarbonization would happen sooner or later, banks, insurance companies have adopted divestment policies, focusing on the more sustainable profits that can be gained from investment in carbon-free energy sources such as solar and wind.
While activism has its place, co-ordinated action by national governments is needed to bring global finance under control. The Biden Administration’s proposal for a 15 per cent minimum rate of corporate tax, already backed by more than 100 countries, is a crucial first step.
https://www.forbes.com/sites/sarahhansen/2021/07/01/130-countries-agree-to-biden-backed-15-global-minimum-tax/?sh=f7e6ff85958f
This will be a continuing struggle, and corporations will doubtless seek new ways to avoid taxes both at home and globally. But the era when companies operated globally while national governments had no capacity to act beyond their own borders has come to an end. With sufficient political determiantion, and international co-operation, it is possible to make both corporations and high-income individuals pay their fair share of the costs of running a modern economy.
{ 27 comments }
MisterMr 10.10.21 at 8:19 am
After the Crisis, the finance share of profits rapidly recover-> recovered
public suppot. -> support
financial markets have produced similar speculative
-> missing word?
most
But how can people save/accumulate wealth without a continuous increase in the financial sector? Also doesn’t reining in the financial sector imply a fall in the private wealth of many people?
I think reining in the financial sector is a good idea, but the resistance will not come only from wall street but also from many middle class people who rally against the big banks and fictitious money, but then when they realize the fictitious money that is going to disappear is their savings will turn very conservative.
Tim Worstall 10.10.21 at 9:52 am
“Chuck Schumbers”
Schumer?
Definitely needs a copy edit….”othe ” ….”amnaged”
“Much of the profitability of the corporate sector derives from socially undesirable activities such as tax avoidance.”
That’s a fairly alarming statement. US corporate profit share is what, 11, 12%? If “much” means “most” or half or something, the claim is that fully 6% of GDP should not be in corporate coffers but in government? A pretty strong claim isn’t it?
” But as it became evident that decarbonization would happen sooner or later,”
That would seem to indicate that it’s not the activism that drove the change but the lack of likely profit from such investments which did.
Bart Barry 10.10.21 at 3:28 pm
Chuck Schumbers
rsm 10.10.21 at 8:07 pm
Can financial markets be socially desirable as a sandbox where people can play, while we’re all insured against their mistakes? (Isn’t it best to keep financiers happy playing with virtual fictitious goods while those who prefer crafting real things don’t need financiers to make a basic income?)
Whose account was debited to pay for QE? Can we use the proven unlimited store of public liquidity to pay for and inflation-proof a basic income?
What if you can securitize the ecosystem benefits of not logging and sell the financial product to the Bezos Earth Fund, frontrunning the Fed?
Seekonk 10.11.21 at 12:00 am
“Hardly anyone in the system faced any serious consequences … the financial sector was, if anything emboldened.â€
Let’s hope that that era has truly come to an end.
For an entertaining account of the global financial crisis and its aftermath, I recommend Fixers: a novel of Wall Street and Washington by Michael M. Thomas.
Its premise is that the CIA saw the 2007-08 financial meltdown coming and undertook damage control by intervening in the 2008 presidential election.
This is the last novel by Mr. Thomas (1936-2021), an alum of Yale and Lehman Bros who knew where the bodies are buried. He was a skillful and witty writer, and he had a deliciously jaundiced view of Wall Street and the Beltway.
MFB 10.11.21 at 9:55 am
I’m not a specialist in this field, but apart from the typoes, here are a few querulous thoughts:
Firstly, I think you greatly exaggerate the support which ever existed for the financial sector among the general public. I don’t see any evidence of that existing before the financial crisis. As a natural result, Democrats and Republicans pretended to support stronger regulation. I see no evidence in practice that either party actually supported stronger regulation.
Of course the power of the financial sector cannot coexist with democracy. Oligarchy and democracy necessarily collide. This is surely why democracy has been dwindling since the 1970s.
The Federal bailouts of financial institutions do not in themselves represent “public supportâ€. I suppose you mean that the bailouts show that the financial sector cannot survive without gifts from government, but these gifts are not necessarily supported by the public; they are for the most part gifts provided by government financial officials who usually have close ties to the financial services industry. Naturally, once banks were awash with money with no strings attached, and interest rates had been eliminated, and the government indicated that it would always save any financial services company with the right connections, this led to a speculative frenzy.
It is probably desirable for the government to know the ownership structure of large corporations, especially financial institutions. However, it is worth considering that the Corporate Transparency Act makes this information reportable to the U.S. Treasury, which is not a particularly transparent organisation as far as I can see.
Financial sector firms have definitely moved away from investing in coal. I see much less evidence that they are not investing in oil and gas. Again, I see no evidence that this is generated by activism; they seem, rather, to be concerned with profits, as one would expect.
If Biden’s proposal for a 15% global corporate tax rate represented an increase in taxation, it might possibly be beneficial for something. However, as far as I can determine the average global corporate tax rate is currently about 24%. In which case Biden is calling for a massive tax cut for the financial sector, which would surely amount to a big generous gift to the sector which would doubtless increase its political clout and thus have the opposite effect to what you suggest.
Jerry Brown 10.11.21 at 10:40 am
Since you say comments and criticism are welcome, I’ll give you a few. You are saying a whole lot of things in this essay. So many different things and there isn’t the flow necessary for me, your reader , to follow it all. I think if you re-read what you wrote imagining a person that really might not have experienced the history of the GFC, you might see what I am saying.
And then imagine someone like me who does remember that history quite well but would disagree with parts of your recounting of it. Well I guess I don’t remember the south seas bubble or eighteenth century England all that much. But this thing needs a little more work from you to organize before we get into arguing about history.
But having read you before- you can make this into something really good that I would be happy to try to poke holes into :)
I’m sorry my first comment here happens to be heavy on the criticism side of things.
Gorgonzola Petrovna 10.11.21 at 7:57 pm
Nations compete for global capital. That’s the game, there’s no way around it. So, let’s say some day 15% becomes the new floor (though I have my doubts). Nations will still compete for capital. They will offer, if necessary, ‘incentives’ (can I call them ‘kickbacks’?) that will cover the 15% tax and then some.
John Quiggin 10.11.21 at 9:41 pm
Thanks for all these comments, and apologies for the rough state of the draft. As mentioned, I was responding to a request, and didn’t have time for a proper edit. I’ll fix the obvious typos. Responding on substantive issues
@1 You don’t need a big financial sector to manage personal savings and lending for mortgages and business investment. That all worked fine (in fact, better0 before deregulation in the 1970s
@2 Oops! I meant “financial sector”, which would bring those numbers down to something like 6 and 2. As regards climate activism, there’s pressure at every point from finance to mines to power stations. It’s all complementary.
@4 In the end it’s real resources that matter. We can afford anything we can do, but no more.
@5 Sounds interesting
@6
* I was a regular visitor (and occasional resident) in the US in the 1990s. CNBC was on TV everywhere I went. Bernstein’s gushing biography of Greenspan was a
* The agreement is for a minimum tax rate. I’ll make that clear
@7 Thanks for this constructive criticism, and for your confidence in my ability to fix things. I’ll try to organize it into better shape
J-D 10.12.21 at 12:36 am
What makes you think that treating the store of public liquidity as unlimited is compatible with the goal of inflation-proofing? Precisely that point is regularly doubted. (As I understand it –although perhaps I don’t–this is effectively equivalent to the point John Quiggin is making in his response.)
J-D 10.12.21 at 12:40 am
The end of this sentence has gone missing.
Peter T 10.12.21 at 9:12 am
A different view of what the financial sector does: it is the manager of the chains of debt (monies owed and owing) that constitute the financial world. As monitor, its job is to keep debt issuance consonant with growth in real capabilities – necessarily a forward-looking task, and therefore one that calls for a conservative outlook in usual times. As issuer, the temptation is create more debt, as profit grows with volume and risk. Hence the sense of Glass-Steagall and similar measures, that separated routine money management from issuance. Governments have had to underwrite more and more debt – as guarantors of national systems – and the US government much more as guarantor of the global system. They have the formal power – but do they have the ability to enforce new rules before the burden overwhelms them?
MisterMr 10.12.21 at 11:38 am
@John Quiggin 8
“You don’t need a big financial sector to manage personal savings and lending for mortgages and business investment.”
Sure you don’t. But if the amount of savings grows faster than the economy (which is what happens when the wealth to income proportion is increasing) then either the average return on wealth has to fall or greater and greater share of GDP will become returns on wealth.
Actually both things are happening contemporaneously: as the wealth to income ratio is growing a greater share of income is becoming return on wealth AND the expected return on wealth is falling, which however only causes an increase in the price of capital assets and therefore an increase in the wealth/income share.
So in order to call back financialisation we need to stop the increase in the wealth to income ratio and, in fact, reverse it.
In practice though this means that a lot of people would see their savings fall, so this policies will be very umpopular.
Trader Joe 10.12.21 at 1:25 pm
Two points:
“Much of the profitability of the corporate sector derives from socially undesirable activities such as tax avoidance.â€
I’d observe that the vast majority of companies fully abide by the tax code they are given to work with….if you don’t want tax avoidance to be a national sport of corporations and the wealthy, don’t write a 144,000 page tax code that provides safe havens for everything under the sun. I don’t disagree with the sentiment of your comment – but I think this is a pretty bold assertion given the reality that most companies are IN FACT law abiding in their tax planning and strategies.
Second – you assert that financial institutions had lost much of their power yet (in the US anyway) the better part of a Trillion dollars of PPP loans were explicitly administered through banks and financial companies so as to quickly get that stimulus into the hands of businesses large and small.
That’s a heckuva lot of responsibility vested in the hands of “unpowerful” banks – and by the way, they did a dang good job on getting that money out. If anything the criticism was they were too generous rather than not generous enough. I appreciate this doesn’t match your narrative, but it detracts from your argument to ignore it entirely.
J-D 10.12.21 at 11:57 pm
John Quiggin described tax avoidance as socially undesirable and you responded that it’s legal as if this were a contradiction. It isn’t. It’s easy for something to be both legal and socially undesirable.
rsm 10.13.21 at 12:36 am
《@4 In the end it’s real resources that matter. We can afford anything we can do, but no more.》
Was oil supply constrained by physics, or by OPEC political strategies in the 1970s? Is the only real scarcity knowledge (we had physical fracking reserves that we were just ignorant of)? Are EU natural gas prices inflating today because of real resource constraints or does Putin simply want attention?
《What makes you think that treating the store of public liquidity as unlimited is compatible with the goal of inflation-proofing?》
Can I ask that we rethink inflation as noise (please see Fischer Black’s 1986 essay “Noise”)? If prices are arbitrary, can we eliminate the inflation constraint by indexation?
Can we learn how to insure away inflation from finance? What if the Fed paid inflation + 2% as interest on individual Fed deposit accounts, to encourage individual savings directly? Can’t the Fed set market inflation expectations by buying and selling TIPS and inflation swaps as part of open market operations?
Tim Worstall 10.13.21 at 2:14 am
“But if the amount of savings grows faster than the economy (which is what happens when the wealth to income proportion is increasing)”
Well, yes. But certainly for the UK (the country I have numbers at fingertips for) the rise in savings is largely in pensions once we pull out the entirely stupid rise in housing value. And higher pensions savings are entirely consistent with longer lifespans. Or at least folks who rationally thought they were going to live longer would save more.
A very decent chunk of that rise in wealth to GDP ratio that Piketty so worries about seems to come from this. Expected retirement years have soared in recent decades. So have pensions savings. The Saez/Zucman thing for the US seems to show the same. Even, there’s a Piketty paper about China, a place with little in the way of old age pensions and health care. The savings rate is at least in part explained by people saving for that (plus the minimal number of grandchildren to support in the more traditional manner).
I’m not saying that it might not be a problem. Instead, as people begin to see that a 10 to 20 year retirement is likely – as has become ever clearer these recent decades – what would one expect to happen to pensions savings and thus wealth to GDP?
MisterMr 10.13.21 at 6:55 pm
@Tim Worstall 17
This would be true if people actually expected to eat into the principal when they get older, but in my experience most people don’t plan to eat into the principal but rather to eat the profits and leave the principal to their heirs.
While from the point of view of a private person this looks very wise, if all society is trying to do this something doesn’t work.
IMHO the increase in savings in middle or lower income families is due to the fact that most governments reduced social security payments: in Italy it is very obvious, my mother generation expected a pension of around 70% of their last wage, my generation expects around 40%.
When the government effected these changes, it also started a campaign to push people into paying for private financial pensions, that obviouly have an impact on savings.
I think something like this happened with 401ks in the USA, I don’t know for the UK.
J-D 10.13.21 at 10:26 pm
Is this a game where points are docked for making a statement?
Tm 10.14.21 at 8:45 am
18: “in my experience most people don’t plan to eat into the principal but rather to eat the profits and leave the principal to their heirs.”
I think this requires a rather special definition of “most people”, along the lines of “most people can’t afford to live in New York City with less than a million in pretax income”
(https://www.lawyersgunsmoneyblog.com/2021/10/somebody-loan-me-a-dime-2)
Re 17, the rise in pensions savings is part of the general neoliberal tendency towards greater wealth inequality. First, pension savings are in themselves very highly unequal. Second, the move from funding retirement mostly through Social Security type systems (pay-as-you-go, Umlageverfahren) to capital funding is implicitly a transfer from low to high incomes. While Social Security is slightly progressive, tax free pension savings is highly regressive since low income workers can’t afford them and high income earners can save immense amounts of taxes. There are also second order effects, like the accumulation of pension capital puts upwards pressure on rents.
It would be not only possible and much more equitable but in fact economically much more efficient to deal with rising life expectancy by strengthening Social Security as opposed to promoting saving, as folks like Paul Krugman have been pointing out forever.
Tim Worstall 10.14.21 at 8:52 am
@18 – UK? At the forefront of the idea. State pension is, compared to average earnings, one of the lowest in Europe.
Tm 10.14.21 at 3:18 pm
Somewhat related to the former point, I find this interview useful:
The problem with America’s semi-rich
America’s upper-middle class works more, optimizes their kids, and is miserable.
https://www.vox.com/the-goods/22673605/upper-middle-class-meritocracy-matthew-stewart
John Quiggin 10.14.21 at 11:30 pm
TM @18 I’m going with MisterMr on this one. The feeling that you should be able to leave your house, and/or a significant part of your savings to your children is common at all income levels, and partly explains the success of resistance to estate taxes even though they are set at a level that affects hardly anyone. I have a relation by marriage who has saved $10000 out of her old age pension and wants to leave it to her (middle-aged and not needy) children, despite their urging her to spend it on herself. That’s not unusual in the current 70+ age cohort. The feeling among homeowners is even stronger.
John Quiggin 10.14.21 at 11:36 pm
I wrote about this in 2011, except that I look at the top quintile not the top decile https://johnquiggin.com/2011/10/14/percentiles/
John Quiggin 10.14.21 at 11:38 pm
Key quote “Another important factor is the growth of economic insecurity. The myth of the US as a land of opportunity for upward mobility has been replaced by Barbara Ehrenreich’s Fear of Falling (another good source on this is High Wire by Peter Gosselin). Even if people in the top 19 per cent are doing well, they are less secure than at any time since the 1930s, and their children face even more uncertain prospects.”
Chetan Murthy 10.15.21 at 2:15 am
John Quiggin @ 23: I live in the US. I’m childless and will remain that way. I’ve saved for my retirement, but plan to continue to live frugally, so that I can leave what remains to my sibling’s children. B/c I’ve fully-absorbed the lesson of modern America, which is that one of the ways that white people ensure the success of their descendants, is by leaving them assets. Maybe it’s a house (I rent, so no), maybe it’s money. But those assets allow children to weather downturns, maybe send their own children to college, etc, etc.
There’s a term for it: “intergenerational wealth transfer”. And in the absence of a society where bad decisions and bad luck don’t cause a free-fall into poverty, we’re going to do it, b/c even if we have no direct descendants, our relatives do.
All of this is too bad: I’m not unaware of the downsides of private provision of “insurance” for my relatives’ descendants, and the upside of doing that in a public manner. Sadly, that’s not the country I live in. But also: none of this excuses people with more than a few million dollars in assets, doing this. OK OK, I’ll go as high as $20m US. I mean, I’ll never have that, but sure, I’ll go that high. That’s enough to set up …. what? TEN descendants really comfortably.
We need steeply progressive confiscatory taxation, and yesterday. Including of my savings, too. Just get the people richer than me first.
Tm 10.15.21 at 8:20 am
JQ 23: Every little anecdote helps ;-)
I don’t much want to argue with you but I would caution against that careless use of language. It is patently not true that people at “all income levels†expect to leave their house and savings to their children, because even in rich countries, most people don’t have any houses and savings. And with regard to pension savings in particular, “most people†simply don’t have remotely enough, if they have them at all, to yield a meaningful retirement income. Sure some of them may be deluding themselves about what the magic of the stock market will do for them. But „most people“? I’m afraid this manner of speaking helps mask the staggering degree of inequality we are dealing with.
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