Money is just an IOU, and the banks are rolling in it

Back in the 1930s, Henry Ford is supposed to have remarked that it was a good thing that most Americans didn’t know how banking really works, because if they did, “there’d be a revolution before tomorrow morning”.

Last week, something remarkable happened. The Bank of England let the cat out of the bag. In a paper called “Money Creation in the Modern Economy”, co-authored by three economists from the Bank’s Monetary Analysis Directorate, they stated outright that most common assumptions of how banking works are simply wrong, and that the kind of populist, heterodox positions more ordinarily associated with groups such as Occupy Wall Street are correct. In doing so, they have effectively thrown the entire theoretical basis for austerity out of the window.

To get a sense of how radical the Bank’s new position is, consider the conventional view, which continues to be the basis of all respectable debate on public policy. People put their money in banks. Banks then lend that money out at interest – either to consumers, or to entrepreneurs willing to invest it in some profitable enterprise. True, the fractional reserve system does allow banks to lend out considerably more than they hold in reserve, and true, if savings don’t suffice, private banks can seek to borrow more from the central bank.

The central bank can print as much money as it wishes. But it is also careful not to print too much. In fact, we are often told this is why independent central banks exist in the first place. If governments could print money themselves, they would surely put out too much of it, and the resulting inflation would throw the economy into chaos. Institutions such as the Bank of England or US Federal Reserve were created to carefully regulate the money supply to prevent inflation. This is why they are forbidden to directly fund the government, say, by buying treasury bonds, but instead fund private economic activity that the government merely taxes.

It’s this understanding that allows us to continue to talk about money as if it were a limited resource like bauxite or petroleum, to say “there’s just not enough money” to fund social programmes, to speak of the immorality of government debt or of public spending “crowding out” the private sector. What the Bank of England admitted this week is that none of this is really true. To quote from its own initial summary: “Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits” … “In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.”

In other words, everything we know is not just wrong – it’s backwards. When banks make loans, they create money. This is because money is really just an IOU. The role of the central bank is to preside over a legal order that effectively grants banks the exclusive right to create IOUs of a certain kind, ones that the government will recognise as legal tender by its willingness to accept them in payment of taxes. There’s really no limit on how much banks could create, provided they can find someone willing to borrow it. They will never get caught short, for the simple reason that borrowers do not, generally speaking, take the cash and put it under their mattresses; ultimately, any money a bank loans out will just end up back in some bank again. So for the banking system as a whole, every loan just becomes another deposit. What’s more, insofar as banks do need to acquire funds from the central bank, they can borrow as much as they like; all the latter really does is set the rate of interest, the cost of money, not its quantity. Since the beginning of the recession, the US and British central banks have reduced that cost to almost nothing. In fact, with “quantitative easing” they’ve been effectively pumping as much money as they can into the banks, without producing any inflationary effects.

What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow. Government spending is the main driver in all this (and the paper does admit, if you read it carefully, that the central bank does fund the government after all). So there’s no question of public spending “crowding out” private investment. It’s exactly the opposite.

Why did the Bank of England suddenly admit all this? Well, one reason is because it’s obviously true. The Bank’s job is to actually run the system, and of late, the system has not been running especially well. It’s possible that it decided that maintaining the fantasy-land version of economics that has proved so convenient to the rich is simply a luxury it can no longer afford.

But politically, this is taking an enormous risk. Just consider what might happen if mortgage holders realised the money the bank lent them is not, really, the life savings of some thrifty pensioner, but something the bank just whisked into existence through its possession of a magic wand which we, the public, handed over to it.

Historically, the Bank of England has tended to be a bellwether, staking out seeming radical positions that ultimately become new orthodoxies. If that’s what’s happening here, we might soon be in a position to learn if Henry Ford was right.

— source theguardian.com By David Graeber

Apple doesn’t want you to be able to fix your own phone

The company has been lobbying against the so-called “Fair Repair Act” in New York — legislation that would require manufacturers to sell replacement parts and ban software locks that would keep users from repairing their own devices without a visit to the Genius Bar. This is all important because “right to repair” laws like the bill in New York would help extend the lifespans of some of our most resource-intensive devices by giving people more access and ability to make simple fixes.

— source grist.org

The Panama papers are not about tax

This deliberately provocative headline is of course not fully true: tax is clearly a tremendously important aspect of the Panama papers scandal, as it continues to roil governments and élites and their advisers, around the globe. But there are far too many commentators who seem to be putting this into a ‘tax’ pigeonhole. Many have dubbed this “the Panama tax avoidance scandal” (or variants of this) — which reflects a profound misunderstanding of what is going on.

First, as an aside, we should probably banish this word ‘avoidance’ from the tax lexicon, because it’s so widely misused and misunderstood (it helps use words like ‘tax cheating’ or ‘escape’ instead, to keep you out of the thorny thickets of what’s legal or not.) But more importantly for today’s blog, these commentators have erred when they put Panama into the ‘tax’ box. Tax is a subsidiary story.

The Panama papers are, most importantly, about secrecy, and . . . hiding: hiding drugs money, hiding money from spouses, hiding from angry creditors, hiding from Mafia-hunting police, and of course hiding from tax too. It is a more general story about wealthy, law avoiding folk and “tax havens” (which are, again less about tax than about other things, as we’ve noted.). Aditya Chakrabortty, writing in The Guardian, cites a TJN expert:

“Thirty years of runaway incomes for those at the top, and the full armoury of expensive financial sophistication, mean they no longer play by the same rules the rest of us have to follow. Tax havens are simply one reflection of that reality. Discussion of offshore centres can get bogged down in technicalities, but the best definition I’ve found comes from expert Nicholas Shaxson who sums them up as: ‘You take your money elsewhere, to another country, in order to escape the rules and laws of the society in which you operate.’ “

Note that the t-word is absent from that loose definition.

One of the few people in the world who has a well-informed insider’s perspective who is also happy to speak out about it is Brooke Harrington of Copenhagen Business School, who took the remarkable step of actually obtaining a professional qualification in wealth management to pursue her studies. As she told our Taxcast recently:

“Tax avoidance was really only the tip of the iceberg. I didn’t realise how much bigger the problem is. Really what wealth managers do extend much more generally to law avoidance. And that creates problems of legitimacy for whole governments: it’s bad enough that people think they are getting shafted because the rich aren’t paying their fair share of taxes: it’s quite another matter when you say there is one law for the rich and one for everyone else and they are not the same: that is the sort of thing that can potentially topple governments.”

— source taxjustice.net

How a private water company brought lead to Pittsburgh’s taps

In the summer of 2015, Metropolis Magazine named Pittsburgh one of the world’s “most livable” cities and gushed about its infrastructure, “The city has more vertical feet of public stairways than San Francisco, Cincinnati, and Portland, Oregon, combined.”

But the magazine hadn’t done its research. Around the same time, the city’s water utility was laying off employees in an effort to cut costs. By the end of the year, half of the staff responsible for testing water throughout the 100,000-customer system was let go. The cuts would prove to be catastrophic. Six months later, lead levels in tap water in thousands of homes soared. The professor who had helped expose Flint, Michigan’s lead crisis took notice, “The levels in Pittsburgh are comparable to those reported in Flint.”

The cities also share something else, involvement by the same for-profit water corporation. Pittsburgh’s layoffs happened under the watch of French corporation Veolia, who was hired to help the city’s utility save money. Veolia also oversaw a change to a cheaper chemical additive that likely caused the eventual spike in lead levels. In Flint, Veolia served a similar consulting role and failed to detect high levels of lead in the city’s water, deeming it safe.

For-profit water corporations see America’s crumbling infrastructure as a business opportunity. Either they buy struggling water systems or market their services to cities like Pittsburgh that need the help. At the same time, they use their political clout to cut taxes, choking off the public money necessary to sustain vital water infrastructure. Veolia, along with other corporations like American Water, is a member of the National Association of Water Companies (NAWC), which actively lobbies for lower taxes.

Last Wednesday, Pittsburgh Mayor Bill Peduto announced the city would provide filters for drinking water, which is the right thing to do. But he’s also considering partnering with another for-profit water company to clean up Veolia’s mess.

Partnering with corporations that must turn a profit should be off the table. For-profit water corporations will always have a financial incentive to cut service, shrug off maintenance, and fire employees. When they’re in charge, the high costs of doing business are passed on to residents: privately owned water systems charge 59 percent more than those that are publicly owned. Every public dollar that goes to executives and shareholders is a dollar that could be invested in making water clean and affordable.

Pittsburgh’s water needs democratic control and public investment, not corporate takeover.

— source salon.com by Donald Cohen
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Is it Vitézi Rend medal

Is President Donald Trump’s top counterterrorism adviser, Sebastian Gorka, a member of a Hungarian far-right, Nazi-allied group? members of the Vitézi Rend elite order confirmed Sebastian Gorka took a lifelong oath of loyalty to their group, which is listed by the U.S. State Department as having been under the direction of Nazi Germany during World War II. Vitézi Rend was established in 1920 by self-confessed anti-Semite and Hitler collaborator Admiral Miklos Horthy.

Questions first emerged about Gorka’s ties to the group after the website LobeLog published photographs of Gorka wearing a Vitézi Rend medal on his lapel at a presidential inauguration ball January 20th. Like many members of the Vitézi Rend, Gorka has also listed his name with a lower-case “v” in the middle—Sebastian L.v. Gorka—including during his 2011 testimony before the House Armed Services Committee. Gorka has denied reports of his involvement with the Nazi-allied group

Larry Cohler-Esses talking:

I worked together with my colleague in Budapest, Lili Bayer, and we were going off of some of the work that was done at LobeLog and with others, where people noticed that Sebastian Gorka wore the medal of the Vitézi Rend, and asked him why, and he said, “Well, it’s a way to honor my father, who spent years fighting fascism and spent years fighting communism.” His father was born in Hungary. His parents fled Hungary after the 1956 revolution. And Sebastian Gorka, himself, was born in London. He wore these medals. He told the press that it was just about his father. And Lili, my colleague in Budapest, was able to find three senior members of the Vitézi Rend in Hungary who said, “No, he’s actually a member” “He’s actually a member.” And this began to seem very notable, because I found that the organization, because of its history, was listed by the State Department in its current Foreign Affairs Manual as a group under the direction—historically, during World War II, under the direction of Nazi Germany. Because of this, the Foreign Affairs Manual listed that there was a presumption of inadmissibility to immigrants who are affiliated with this organization.

Now, to be clear, there’s a couple of nuances here, and I should be very clear about this. After World War II, under the terms of the treaty with Hungary and the Allies, the Vitézi Rend was forcibly disbanded. But it reconstituted itself outside of Hungary among exiles who were loyalists to Admiral Horthy, the wartime ruler of Hungary, with the same ideals, with the same leadership and the same ideology. And after the fall of communism in 1989, the Vitézi Rend came back to Hungary and reconstituted itself there. It split into two factions based on personal leadership. And Sebastian Gorka, we were told by the members of the group, is affiliated with the faction called the Historical Vitézi Rend. We looked a lot at what Gorka himself has written. He has often written in publications. He’s written in publications that are notably anti-Semitic. He’s partnered, to start a political party in Hungary, with known anti-Semites from the far-right Jobbik party. But we have not found that he, himself, has ever said or written anything anti-Semitic. But the question is one about his partners and who he works with and whether he actually is a staunch opponent of anti-Semitism, when he works closely with groups like this.

the Vitézi Rend has some pretty firm rules. You do not get to wear the medal and use the “v” initial unless you join. And joining involves taking a lifelong oath, a oath of fealty to the organization and its principles and to Hungarian nationalism, which the organization is steeped in. We spoke with a senior member of the group, who took note of the “v” that he used both on his doctoral dissertation in Hungary and when he testified before Congress. And he said, “Of course. No ‘v’ without the oath.” So, under these terms of the organization, if he was trying to honor his father, he was dishonoring the rules of the organization that his father was honored by. And I cannot read his mind. I was not in Hungary. But we then found three separate sources in the organization who said he did take the oath, he was initiated in the formal initiation ceremony into the organization.

his status as an American citizen and as a legal immigrant could be undermined. I’m not an expert in immigration law, but in our reporting we spoke to Bruce Einhorn, who was an immigration judge for 17 years. He now teaches immigration and nationality law at Pepperdine University. And perhaps most importantly for this unique situation, before that, he was deputy director of the Justice Department’s Office on Special Investigations. This is the—this was the unit in the Justice Department charged with finding and deporting Nazis and members of other extremist groups who got into the United States by lying about or hiding their background. And he told us that someone who is asked, as you are asked in these applications for immigration and citizenship, about the organizations you joined, and you don’t write it down, is vulnerable to a reversal of their legal immigration status or their citizenship status. He told us that there would be defenses for Gorka if he was prosecuted, but as a prosecutor with OSI for that many years, he said, “This is a case that I would take up. It’s a legitimate case. And it would be a challenging one, but it’s a winnable one.” So, that is the state of the technical legal arguments involved, but they all spring from the fact that he was obligated, if he was a member, to disclose it at the time of his immigration and citizenship application.

there is a phenomenon, that we have commented on in The Forward, where you have people who, because of the role Israel plays in the Middle East and because of their bias against Muslims, they like Israel. And yet, domestically, they can be anti-Jewish. It is possible to be anti-Semitic and pro-Israel. It’s a phenomenon that’s emerged. I don’t know if Gorka is that. As I said, we have never found that Gorka wrote anything anti-Semitic or anti-Jewish. What we found are these troubling associations. He said in his White House official statement that it was absurd and outrageous for anybody to say that he was anything other than opposed to anti-Semitism. I don’t know how you define opposition to anti-Semitism, but partnering with a group like Vitézi Rend and with former members of the far-right, anti-Semitic Jobbik party would exclude many definitions of being opposed to anti-Semitism.
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Larry Cohler-Esses
The Forward’s editor for special projects.

— source democracynow.org

The problems with measuring tax systems

In the past few years there have been several efforts to understand and even measure ‘spillovers’ – that is, how one state’s tax or legal system can transmit damage to other states’ tax or legal systems. Perhaps the best known of these efforts is the Tax Justice Network’s Financial Secrecy Index (FSI), which attributes a secrecy score to every country measured, then combines that score mathematically with a size weighting, to create a ranking of the world’s most important secrecy havens. The index has been extremely effective in drawing attention to the issues, and in uncovering a lot of new data and analysis and understanding of the offshore phenomenon which lies at the heart of financial globalisation.

The FSI deals with secrecy: there is a clear need for something similar in the area of tax. Corporate tax loopholes in one country, for instance, can have similarly damaging effects on the corporate tax systems of other countries, by encouraging multinationals to shift profits to the lower-tax jurisdiction, depriving the higher-tax jurisdiction of revenues. People are, rightly, rather angry about this.

A little work has already been done in this area. The IMF published a paper in 2014 entitled ‘spillovers in international corporate taxation,’ a first stab at measuring the scale of the phenomenon. Coming at it from a different angle, Oxfam recently published a report on ‘the world’s worst corporate tax havens’ whose methodology produced a ranking a bit like Financial Secrecy Index’. The corporate tax havens of Ireland and the Netherlands recently published ‘spillover analyses’ of their own tax systems which, surprisingly or unsurprisingly, depending on how cynical you’re feeling, largely absolved themselves of blame.

This is an area where much more work needs to be done. Now Andrew Baker and Richard Murphy offer a new, broad framework for thinking about how one might go about it.

Their blog Reframing Tax Spillovers, and the associated paper for the APPG, rightly highlights the flaws in these other projects, and offers something more comprehensive and useful.

Crucially, Andrew and Richard recognise that there are different dimensions of spillover: not just from one country or state to another, but also between different taxes in the domestic economy. For instance, the corporate income tax was originally set up in order to defend the ordinary income tax: if you have no corporate tax then rich folk simply convert their ordinary income into corporate income and escape the income tax. As they put it: ‘Taxpayers will try to divert part of the income that should be subject to this tax to another tax or location, or both.’ This happens all the time – and of course there are spillovers that cross both tax boundaries and national borders. This early-stage concept is highly welcome, and I can imagine it flowering into something big and useful.

Yet there is another generic issue that also needs highlighting: the conservative bias in measurement itself.

Much has been said about neoliberalism – the disenchantment of politics by economics, as Will Davies has put it – in a sense, the effort to shoe-horn as many aspects as possible of life, the universe and everything into the price system.

Much has been written about how neoliberalism, neoclassical economics and the economics faculty at Chicago University have injected a conservative bias into economics. But there’s an even deeper problem than this: in the area of tax, the very act of measurement is likely to impart a conservative bias.

This is for a pretty simple reason. Take a corporate tax cut, for instance. Leave aside the question of tax spillovers to other countries, and start by asking: ‘does this tax cut help my own country?’ What does it look like from a purely selfish national perspective?

Many studies have done this. Does the corporate tax cut foster new corporate investment, or bring in Foreign Direct Investment (FDI)? Oceans of work have been done here, and plenty of the political discourse in Britain, and in many other countries, leaves the matter at that. If it attracts FDI then that tax cut is ‘competitive’ – so let’s do it. After all, who could oppose a ‘competitive’ tax system?

But of course the story doesn’t end there. FDI is a means to an end, not an end in itself. If you have to spend a lot of treasure to attract that FDI, the cost may not be worth it. Britain’s corporate tax rate cuts since 2010 are forecast to cost nearly £15 billion a year in lost tax revenues by 2021 – which is well over a third of the education budget. It’s hard to see that this equation makes for a ‘competitive’ tax system – whatever ‘competitive’ might mean in this context. I would argue that pretty much all of that academic work just measuring elasticities is, for this reason, pretty meaningless from a policy perspective.

If one could do a good cost-benefit analysis – as in ‘here are the benefits of a given tax cut, weighed against the costs’ – then one might be able to draw a better conclusion about the merits or disadvantages.

But this is where the conservative bias comes in. It’s relatively much easier to measure the ‘benefits’ side of a tax cut – FDI responses, elasticities and so on – than it is to measure the costs.

That is, it’s relatively easier to measure things like investment responses, elasticities, which in isolation tend to favour tax-cutting, than to measure the other side of the ledger where the damage of tax cuts shows up: such as by reducing the long-term benefits of (tax-financed) infrastructure or education, which might play out over decades; or confidence in the overall tax system and democracy itself, as corporate tax rates fall far below personal income tax rates, or the effects of higher inequality exacerbated by corporate income tax cuts, and so on.

As the US public finance expert Robert G. Lynch put it to me recently: ‘It is much harder to measure the damage from reductions in public investment due to tax cuts than it is to measure the benefits from tax cuts.’

Researchers often stick to what they can measure, and to the extent that they do acknowledge the other, harder to measure side of the equation, it tends to be in more narrative form. So even when there’s a suitably nuanced report, policy-makers can cherry-pick out the numbers and throw away the narrative as so much fluff. This happens all the time. And that’s before we even get to the lobbying and role of private finance sponsoring some academic research.

There’s no obvious way around this: more narrative emphasis on the hard-to-quantify stuff will just get airbrushed out of the way of tax cuts. What is necessary is to de-emphasise of the role of economics and measurement in these debates, and to rekindle the politics. Civil society has been doing a decent job here: but academia and policy-makers have too often been in the thrall of the economists.

What is needed, at the end of the day, is to pursue the disenchantment of economics by politics.

— source speri.dept.shef.ac.uk by Nicholas Shaxson