Topic: International Economics and Development

European Commission Pushes Hypocritical Regulatory Message

The bureaucrats in Brussels are infamous for promulgating directives that add to the regulatory burden in European Union nations. Yet the same bureaucrats are pressuring national governments to adopt deregulation targets. This do-as-I-say-not-as-I-do message certainly rings hollow, though European consumers would benefit if politicians reduced red tape. The EU Observer reports:

EU leaders have agreed to a somewhat stronger goal on cutting red tape in their national legislation, despite previous reluctance to commit to a reduction of 25 percent of administrative burdens. …The move comes after last-minute pressure from the European Commission, urging governments to make a clear commitment to cut national bureaucracy which accounts for half of the bloc’s administrative costs. …Brussels believes red tape reduction would boost the EU economy by the equivalent of 3.5 percent of GDP and free up an estimated €150 billion for investment but only if national targets are included.

Will Halliburton Escape America’s Bad Tax System?

Some politicians are denouncing Halliburton for moving its headquarters to Dubai, but this is not a full-fledged corporate “expatriation.” Halliburton is only moving its headquarters, not its place of incorporation. Under US tax law, Halliburton will continue to be taxed on its worldwide income so long as the company is still chartered in Delaware. The move does not save the company one penny, at least from a tax perspective. To advance the interests of shareholders, however, the company should seek to change its place of incorporation. America’s worldwide tax system, combined with a high corporate tax rate, make it very difficult for multinational companies to compete in global markets. Unfortunately, it is now increasingly difficult to escape the Berlin Wall of American taxation, though Halliburton executives presumably are looking at the options. The politicians, meanwhile, should stop demagoguing the company and instead lower the coporate rate and shift to a territorial tax regime so that American companies can compete on a level playing field. ABC News reports:

The much-maligned defense contractor Halliburton is moving its corporate headquarters from Houston to Dubai in the United Arab Emirates. …Sen. Patrick Leahy, D-N.H., called the company’s move “corporate greed at its worst.”  …Fellow Democratic Rep. Henry Waxman, D-Calif., who chairs the House Oversight and Government Reform Committee, which has investigated contractor fraud, is planning to hold a hearing. “This is a surprising development,” he said. “I want to understand the ramifications for U.S. taxpayers and national security.”

Let America Benefit from Brain Drain

In a globalized economy, it is very easy for capital to cross national borders. This provides an excellent way for the market to punish governments that over-tax, over-spend, and over-regulate since capital will flow to jurisdictions with less statism. It also is increasingly easy for skilled labor to shift from less competitive nations to those with more opportunity. The United States often is at the top of the list of desired destinations for the world’s best-and-brightest. Unfortunately, even though these skilled workers and entrepreneurs would generate more wealth for America, they often are unable to overcome restrictive immigration laws. Investors’ Business Daily explains how this policy hurts the United States:

America has it all backward. Our country’s doors are open to the low-skilled while we keep out the talent that’s crucial to our competitiveness. …The global economy is a brain game, and the nations with the best-educated work forces are the ones that win. …there’s a talent gap that can be filled only by relaxing restrictions on foreign computer scientists, software engineers and other highly trained workers who want jobs in the U.S. …Much of the work in fields such as software development might still get done offshore. But that would not produce jobs here. More critically in the long run, it would deny America a stream of capable, creative people. For many visa holders, the temporary permit is a step toward permanent residency. Allowed to stay, they may do more than just work here. They may start their own businesses and create work for others. …The issue here isn’t America’s failure to control its borders. It’s that America does too good a job of excluding some of the people it most needs.

Iceland’s Laffer Curve

The Wall Street Journal notes that corporate tax revenue has jumped dramatically in Iceland, even though the corporate tax rate has been slashed to 18 percent. That sentence actually should say that revenues jumped because of the lower tax rate. Iceland is a clear example of the Laffer Curve. As the rate fell, companies had less reason to avoid taxes. The low rate also encouraged additional economic activity. Iceland’s workers are the biggest winners, of course, since they now enjoy higher incomes and more prosperity:

The benefits of low taxes are on full display in Iceland, which provides an almost perfect demonstration of the Laffer Curve. From 1991 to 2001, as the corporate-tax rate fell gradually to 18% from 45%, tax revenues tripled to 9.1 billion kronas ($134 million in today’s exchange rate) from just above 3 billion kronas. Since 2001, revenues more than tripled again to an estimated 33 billion kronas last year. Personal income-tax rates were cut gradually as well, to a flat rate of 22.75% this year from 33% in 1995. Meanwhile, the economy averaged annual growth rates of about 4% over the past decade.

The editorial also notes that tax competition is encouraging good policy in other European jurisdictions. It is not surprising that Swiss cantons are lowering tax rates, but it is noteworthy that even the tax-loving German politicians are being forced to reduce the tax burden:

In addition to Eastern Europe’s flat-tax movement, there is healthy rivalry from Switzerland, where the individual cantons can set their rates independently. Obwalden just lowered its corporate-tax rate to 6.6%, drawing criticism from the European Union, which called it an illegal subsidy. One of the biggest critics, Germany, recently announced that it will cut its corporate-tax rate to just below 30% next year from the current rate of about 38%.

U.S. Economic Misery — or Delusion?

Opponents of trade liberalization are painting themselves into a corner. They repeat endlessly that rising imports and trade deficits are bad for the U.S. economy and American workers. Imports and the trade deficits they fuel supposedly reduce U.S. employment and wages and impoverish American households as we borrow more and more and sell off the family jewels to support consumption. And since imports and trade deficits keep expanding, our economy must be getting worse, right?

Wrong. This morning the Labor Department reported that the U.S. unemployment rate fell again last month, to 4.5 percent, which must be full employment by anybody’s definition. Almost 100,000 net jobs were added in February, despite cold weather that crimped construction. Those job gains come on top of a revised net gain of 372,000 jobs in December and January, bringing net employment growth in the past four years to 6.5 million. Today’s report also confirms that real wages continue to rise for American workers.

Adding to the favorable picture, the Federal Reserve Board reported yesterday that the net household wealth of American families in the last quarter of 2006 reached a record $55.6 trillion. And that is net wealth: what we own after subtracting mortgage, consumer and other debts. Our net wealth is up 43 percent in the past four years, driven by increases not only in home values but also stock prices.

Granted, our infinitely complex, $13.5 trillion economy will have its ups and downs, but the current reality simply does not square with the politically tainted picture of economic misery and hopelessness being portrayed by certain critics of trade.

Swedish Pension Reform

Sweden is widely considered a cradle-to-grave welfare state, but that is somewhat misleading. The burden of government is significant, to be sure, but there have been some impressive market-oriented reforms. Sweden, for instance, has eliminated its death tax and implemented school choice.

Perhaps most surprising, Sweden has partially privatized its Social Security system. The amount going into private accounts is small — just 2.5 percent of earnings, so the system is not nearly as good as Chile’s, but it is much better than the American system.

In addition to small private accounts, Sweden also has created a direct link between taxes paid and benefits received. This shift to a “notional” defined contribution system represents a significant departure from traditional Social Security systems, which are akin to defined benefit schemes containing widespread redistribution.

The Wall Street Journal reports that the Swedish reform is inspiring other nations to move in a similar direction:

By pegging public pensions to individual earnings and overall life-expectancy rates, Sweden has given its citizens incentives to be more productive and retire later — and sidestepped the political paralysis that has stymied change elsewhere.

Some Eastern European nations have already ditched their struggling post-Communist systems and gone Swedish. Steps taken in countries as diverse as Brazil and Russia boast some Swedish elements. A World Bank book based on the Swedish model has been translated into Chinese.

…[C]alculating payouts according to salaries and aging projections gives [the Swedish system] the flexibility to accommodate revenue and population shifts. If the economy does poorly, the thinking goes, future pension payments will go down. And the longer people in a particular age group are projected to live, the smaller their pension payouts will be.

…The bottom line of the Swedish model: Most people will have to work harder to reap the kinds of pensions their grandparents could take for granted. “It puts the cost of aging onto the individual, rather than onto society,” says Sarah Brooks, an Ohio State University political-science professor who has studied the plan.

Skyscraper Signals

The boldest skyscraper project the world has seen in 75 years is currently being contructed in Dubai. The Burj Dubai will apparently top 2,600 feet, which would be 56% taller than the current tallest building (in Taipei) and more than twice as tall as the Empire State Building.

The American has a good cover story this month on the current tall building boom.

And Wikipedia has some construction shots of the Dubai project.

If privately financed, skyscraper projects are an interesting indicator of business sentiment in a city or a nation and investor bullishness on growth. If you want to know what business and investors in Chicago, Paris, London, Hong Kong, or Sao Paulo think about growth prospects in those cities, check out the skyscraper construction market. You can do that at this amazing site.  

Even Ayn Rand would be impressed with the current explosion in cloud-topping building projects.