Monday, March 30, 2009
There is this book written by Mario Vargas Llosa -El pez en el agua- where he describes the approach of his presidential campaign for Peru in the late 80's.
His was a liberal approach to economic policy and civil rights, among several interesting ideas contained on the book, he points out how the so called informal economy -those economic agents performing activities out of the tax system, not necessarily in black markets- is a direct result of the gross bureaucracy and the inability of the State to provide legal certainty at zero costs.
The reading provides a new approach that fits with precision all conditions Mexicans face. It is straightforward to observe that, as Vargas Llosa says, law is a privilege for those go have a high income or political influence.
Can there be a case for defend all Mexicans involved in an informal activity in Mexico? Not for all of them maybe, but certainly for those who make a cost-benefit assessment and conclude that it is not worth it to be fully registered.
Take the following example. It is rather common that an employer offers to a worker a "word" contract instead of a signed one. The incentive for the worker to accept the offer consist of the advantage of not paying taxes, though not having social security, in exchange of a higher monetary wage.
Since public health services are of low quality, the worker of above can easily prefer to buy private insurance with the money he is not paying in taxes or social security.
There are no incentives for an agent to be part of the formal economy, he is not receiving quality services at all, on the contrary he must go through an awful bureaucratic system to get health services.
Welfare states are easily corrupted and transformed to under attain their objectives. It has been seen that Latin American state structures favor only those with political connections. This is, services assumed as public are in practice privatized, just as Hayek suggested in his Road to Serfdom.
The latter is an explanation for the existence of the informal economy. Moreover it attach full responsibility to the state structure for it's existence.
Sunday, March 29, 2009
Attention to their policies about active rates was drawn when it came to light that these institutions are still profitable. Official agencies such as the National Banking Comission (CNBV) declared that profits were to be explained by charges on depositors, other than interest rates, for example, those made cause of transactions, commonly known as commissions.
Furthermore, it was made public that rates are considerably higher in Mexico than in banks' home- countries.
These facts caused outrage in a number of political sectors. Even though banks argue that high rates can be supported on an income and risk assessment, comissions can not.
There is one more argument that add weakness to the risk argument of above, Mexican bank market is an oligopoly.
This is why Congressmen are inolved in a series of reforms addressing high rates and comissions. However popular, the first problem -interest rates- is far more complicated to solve. It involves a series of reforms of the market structure since an apparent colusion is taking place.
Comissions on the other hand, are only an instrument for voracious rent-seeking. It is common knowlege, for example that if one holds 1k pesos in a bank account for a year, the balance will end up well below 1k pesos, since a comission of no use would have charged.
The latter is a clear example of a pervasive rent-seeking scheme, which in turn provides with no incentives to lend to a risky project. Moreover, high interest rates with long terms became an appealing mechanism to dilute consumption credit risk.
Put together all these features and you will have a poor banking system. Possible solutions rely on legislation, certainly not for high interest rates, but for the high level and number of comissions. A fix yearly schedule for these charges should be decided by either the Central Bank or the CNBV. In order to address the number and level of comissions a feasible solution should be to increase savings mobility across banks. This only measure will end up reducing both the number and the level of comissions -I. Llamosas thought this too.
Another possible measure can force the recipient bank to pay for the comission charged for changing one's savings account from a bank to another. An optimal rule would include a zero comission in changing banks for a depositor.
The case for an upper bound in interest rates is more complicated. Assume there is a maximum rate i*. Every economist knows that the interest rate is composed by at least three parts. First, it must measure the risk of re-payment. Second, it must provide inflation insurance. Third, it includes an extra positive profit for the bank.
Assume this third part is zero -like a competitive market should observe. Now, there are at least two kinds of agents with high inherent risk, the lower income citizens and the risky projects undertaken. Both would need to pay an interest that would probably be higher than i*. So, none of this agents will be a subject with credit worthiness. The latter may force this agents on to the black market of credit, known for it's ruthlessness.
Assume that i* is set too low, then this latter case holds. Assume i* is set too high, then we have the current situation, and there are no incentives for banks to lend at a competitive rate since a possible solution (a collusive one) is to set rates at i*.
Although profitable in terms of votes for this summer's election, imposing an upper bound to interest rates charged on banking loans is not an option. Congress should focus on comissions and improving market mechanisms in order to guarantee competition.
Sunday, March 22, 2009
Although I usually would agree with this view, I think that the alternative would have been economic depression. It is true, all plans to stimulate the economy are inherently imperfect, however, the common phrase "doing nothing is not an alternative" is most appealing now. Martin Wolf has recently put a lot of work in making a case for coordinated action next April in London, in an extremely opposite approach.
Three questions remain: can a country with high debt spend it's way out of recession? Can a non-Ponzi game condition not be imposed to countries? Can the U.S. take advance of its seniorage position forever?
The immediate answer is: as long as there is a creditor, this country can do it. There is an underlying assumption here: the money borrowed will make the economy growth enough to allow debt re-payment. Moreover, there is another effect, the latter increase in bond supply should press interest rate in the opposite direction than the one desired by the FED, how this should be addressed?
John Cochrane offers a feasible solution. Lasts week announcement by the FED, saying it would buy 300 billion dollars of public debt, can be the first step into Cochrane's solution. The remaining step is in the Treasury's side, it could now buy first quality debt issuing public debt instead.
This measure should have two major features. First, it should help the U.S. to change external public debt for national, deleveraging from China and forcing it to spend (or appreciate its currency). Second, it is far easier to remove bonds from public than social programs, this is, when recession ends, government spendig should be reduced, and bonds provide an easier mechanism to do it.
Thus, Cochrane's proposal should not be dismissed and it deserve further analysis. Although it is fairly straight that the U.S. can issue as much debt as it needs as long as there exists a huge trade surplus at China, a central point should be to securing Treasuries reputation as the safest asset, Ponzi games can destroy this reputation causing caos. Furthermore, all efforts to make the economy grow should always be evaluated in the face of future inflation, history has shown that great increases in money supply will end up reflecting higher prices.
Monday, March 16, 2009
This tax is federal, but it's totally redistributed across states, this is, all political cost is shouldered by federal government while benefits are fully enjoyedl by states.
There are all kinds of pervasive incentives with the current setting. Last week at Congress a debate about ending this tax became alive. It was clearly a political move since this summer's election is just around the corner.
It is considerably appealing to remove taxes without increasing marginal rates, clearly it is impossible to do so without the issue of more debt.
The best option there is, consist on change the federal-nature of the tax into a state-nature. The latter has several advantages. First, incentives for accountable spending will subside. States would have to absorb political cost.
Second, in terms of economics, the tax would be flexible in the following sense: every state will be able to decide whether to levy the tax or not. This in turn could be decided according to particular needs. Take, for example a state with a city that has heavy car traffic. In order to incentive the use of the public transport the marginal tax rate can be positive.
In a polar example, take a state that has a relatively high poverty level, in this case the tax can not exist in the first place.
A final example may refer to states that host a car manufacturer, thus depending heavily on jobs it creates. The tax can be address to a particular subset of population and encourage, this way job creation.
However unpopular, a serious assessment of the tax can shift the current approach to one that explains to Mexicans how it can be used as an environmental tax of some sort.
A stronger foundation for levy a tax like the one discussed here is to treat it like a car-traffic tax. Let us not forget that every time we drive a car we increase the probability of an accident occurrence. Moreover, car traffic is inherently increased. If the last two arguments are not enough, it can always be assumed that the use of street soil is taxed.
It is plausible to conclude that, despite it's unpopularity -it can be argued that there is no such thing as a popular tax- a subtle change in it's nature would do a lot in it's defense. It may be true that changing the pay schedule - to several monthly payments from one per year- can be a start. Changing be federal nature of a state one would almost do the entire transformation.
Mexican peso has showed a remarkable positive path on the last four sessions gaining from it's record price, 15.60 pesos per dollar, 1.10 pesos to 14.50.
Mexican authorities put in motion a program of dollar auctions in order to re-gain confidence in Mexico's currency, it was rather difficult to attach the 50 per cent depreciation to the economy's health, reasons were to be found in the slump of capital flows into emergent economies -capital on-flows in 2009 are projected to reach only one third of 2008.
Another key factor of Mexican currency depreciation is the increase of the trade deficit attached to the fall of U.S.' imports. Mexican foreign trade is highly dependent of exports to be U.S.
This last factor will abide until power of purchase is re-gained in the north. Financial factors, however, are in dis-stress this week should prove as a big test in order to claim a frank recovery.