Archive for April 13th, 2020

COVID-19 crisis presents a 100-year chance to shake up debt and taxes

April 13, 2020

Andy Mukherjee has this really interesting piece which has lots of economic history buried in it.

As they say road to hell is paved with good intentions. For a long time high leverage has been a bane for most industries. The question is why firms choose to leverage themselves despite knowing that it will cost them dearly during a downturn.

Andy points that this is mainly due to an accounting practice which started 100 years ago during Spanish Flu:

It was in 1918, when economists were likening the global spread of an excess profit tax on wartime corporate income to the deadly outbreak of the Spanish flu, that the US relented and allowed all interest paid to be deducted from taxable profit. It was a temporary measure to give firms relief, but although the extra tax burden went away in 1921, the favorable treatment of interest income stayed and was copied around the world.

Hmm.. Did not know about this history. This has led to firms preferring to issue debt over equity which has led to higher leverage.

Andy asks to do away with this clause. Will Governments bite?

Putting Swiss Public Debt to use and not worrying about monetising deficits..

April 13, 2020

Cédric Tille in this voxeu piece points how Swiss Debt brake system has led to Swiss deb  being just 13% of GDP. Time to use these low debt levels to push spending and growth:

Swiss public finances have been doing very well over the last twenty years. The debt of the Swiss national government amounted to 13% of GDP in 2018, down from a peak of 26% in 2002 (Figure 1), and this looks set to continue. This excellent performance is a direct result of the adoption of a debt brake rule in the late 1990s following a decade where the trend was quite worrisome (Brülhart et al 2017). Aren’t the Swiss – typically – overzealous however? The strict implementation of the rule has led to a reduction of debt, not just relative to GDP but also in absolute terms with nearly a quarter of the debt being paid back since the early 2000s. All this at a time where the cost of the debt has trended down to negative values, even for long maturities (Figure 2). Switzerland seems to have a problem of too little debt (Bacchetta 2017), and is an extreme case of a pattern observed in other countries (Hüther and Südekum 2019).


Instead of reducing its debt level, which in the current configuration amounts to investing at a negative interest rate, Switzerland has several more appealing options. Moderate fiscal deficits, and/or a fund could bring a couple of billions annually to public finances. It won’t be enough to handle the challenges of health costs and ageing for public finances, but it would help. The debt margin can also be put to use to handle the cost of the current recession.

The options are compatible with the debt brake. Moderate deficits keep the debt steady relative to GDP, which is the relevant metric for assessing the burden. A sovereign fund raises the debt, but this is matched by assets leaving the net worth unchanged. Using fiscal policy to counter the epidemic will lead to a debt increase, but this is a clearly identified one-off shock and the debt brake can ensure sound dynamics subsequently. 

In another voxeu research, Olivier Blanchard and Jean Pisani-Ferry say even countries having high debt levels should not worry:

Relationship between Globalisation and Financial Contagion: inverted U shaped curve..

April 13, 2020

Olivier Accominotti, Marie Briere, Aurore Burietz, Kim Oosterlinck and Ariane Szafarz in this voxeu piece:

The history of pandemics shows we can only contain them and never vanquish them…

April 13, 2020

Prof Edoardo Campanella of Madrid University in this terrific Proj Synd piece reviews two books on history of pandemics:

He draws lessons draw from the two books:

In 1969, the US surgeon general, William H. Stewart, told Congress that it was time “to close the books on infectious diseases” and “declare the war against pestilence won.” Antibiotics, vaccines, and widespread advances in sanitation were making the world healthier than ever. Within a few years, the medical schools at Harvard and Yale actually closed their infectious-disease departments. By then, polio, typhoid, cholera, and even measles had essentially been eradicated, at least in the West.

But triumphalism was not only premature; it was dangerously foolhardy. The HIV/AIDS epidemic broke out in the United States just a decade later, and never has been vanquished. Then, following a short lull in the 1990s, came SARS, MERS, Ebola, Zika, and avian and swine flu, to name just a few of the outbreaks so far this century. Though most of these new diseases have primarily afflicted the poorest parts of the world, they should have made clear that the war on microbes was far from over.

Nonetheless, a sense of invulnerability has prevailed in the West. It was assumed that even if epidemics had not been consigned to history, they posed a risk only to geographically and economically distant societies. The novel coronavirus that emerged in Wuhan, China in December has shattered this illusion, showing once again that novel pathogens are equal-opportunity killers.

After initially deceiving ourselves that COVID-19 would remain just another Asian health crisis, the entire world is now grappling with a runaway pandemic. Suddenly, public-health authorities everywhere are trying to flatten the contagion curve with quarantines, travel bans, and unprecedented society-wide lockdowns, while governments and central banks try desperately to flatten the recession curve with unprecedented stimulus packages.

Sounds so familiar to pre-2008 hubris..

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