Stocks are cheap

...say two NY Fed economists. 

 

On the virtues of honest apologies

Apologizing can be very hard, especially when your pride is hurt. And sometimes one opts for a fake apology, not really meaning it. But this does not really fool the apologizee, doesn't? Is the latter then unlikely to forgive? Of course, an economist has an answer to this question.

Verena Utikal performs a laboratory experiment wherein the dictator game is manipulated to sometimes keep outcomes out of the control of the dictator, who can send a message. The receiver can then act on outcome and message, but without knowing whether the outcome was a choice of the dictator. Dictators do send different messages depending on what happened, and receivers do detect lying and punish it. If you considering that there is a mental cost in lying, there does not seem to be much of a point in providing fake apologies. Yet people do it. And consider that in this experiment, all players were anonymous and did not see each other. Imagine in the real world, where they know and face each other. The cost of lying and faking must be even higher. Yet it still happens.

Too much legalese at the WTO

The World Trade Organization exists to foster free trade and to resolve disputes about unfair trade practices. It is thus an organization that treats with legal issues over an eminently economic matter. How much is Economics used in the process? Or has the WTO been captured by lawyers.

Thomas Prusa looks at three recent decisions in the dispute process. While it is not possible to see what happened inside the WTO, it seems pretty clear from the decisions that the Economics in them is lacking. It just looks like a situation where economists have been bypassed and the decision may make legal sense, but certainly not economic sense. Prusa argues that lawyers should not have been afraid of complex, abstract economics in the cases he looks at, as simple Masters' or even undergraduate level economics would have helped reach a better decision. While there is no doubt the cases have a strong legal aspect. at least some economics would have been good.

Larry Summers on Reinhart and Rogoff

Here.

Strict environmental policy through tax competition

Tax competition is a double-edged sword: it keeps government on their toes regarding their expenses, but it also saps their ability to provide public goods. Generally, you would want some level of cooperation across authorities, like in a cartel, as pure tax competition is not believed to reach optimal outcomes. This is particularly true with environmental regulation and taxation.

Cees Withagen and Alex Halsema claim that tax competition may lead to a first best in an environment with cross-border pollution. The important word here is "may" as it still needs to be established that it can happen in practice. The innovation to their approach is to include endogenous capital to the model: capital can flee to other jurisdictions if it is taxed too high. Governments then play against each other. This pushes them to keep capital tax rates low. With more capital and income, demand for environmental quality is higher and emission tax rates are higher. With some luck, the latter may get exactly at the first best. It all depends on the environmental demand parameters, which are hard to estimate, though. A good opportunity to find some better measurements.

Divorces of (Real-Estate) Convenience in China

To paraphrase Steely Dan, this is not your Haitian but your Hainan divorce. Recent regulations in China intended to tamp down real-estate speculation have had an unintended consequence of separating happily married couples to take advantage of better tax benefits accruing to single persons:

Long queues of happy couples waiting to get married might be a common sight in Las Vegas. But lines of happily married couples waiting to get divorced? Only in China. In major cities across the country last month, thousands of couples rushed to their local divorce registry office to dissolve their marriages in order to benefit from fast-expiring tax breaks on property investments for unmarried individuals.

Local media reported long waits at registries in Beijing, Shanghai, Guangzhou and elsewhere as savvy investors sought to buy or sell a second home before the government introduced strict new regulations that would force married homeowners to pay hefty taxes on the sale of second properties.

The new regulations are designed to cool speculation in China’s feverish property market and are part of a package of measures that would require couples to pay up to 20% capital gains tax on the sale of second homes. But for determined investors, nothing gets in the way of a good bargain, and some quickly noticed that the 20% impost didn’t apply if the second home was bought before the couple were married — or after they got divorced.

It seems the authorities have caught on, though, and singles are increasingly unable to take advantage of the breaks sought after by the divorcees-of-convenience:

The divorce solution is extreme but it’s the kind of solution to which China’s put-upon middle classes have become accustomed...Of course, the country’s regulators have also taken notice of the long queues outside divorce registries and have acted to put a stop to the practice. In recent weeks, the government revised its regulations to increase the taxes payable by unmarried individuals selling a secondhand property, effectively cutting the most speculative investors out of the market.

Don't you just love it when marriage, profitology and authoritarianism collide?

Fiscal consolidation: At what speed?

From Olivier Blanchard and Daniel Leigh.