Inflation Targeting and Neoliberalism, Part 3

Regular Triple Crisis contributor Gerald Epstein is a professor of economics and a founding co-director of the Political Economy Research Institute (PERI) at the University of Massachusetts-Amherst. This is the concluding part of an interview in which he discusses the rise of “inflation targeting” around the world. The first two parts are available here and here.

Gerald Epstein

Alejandro Reuss: In your view what would be a preferable approach to central bank policy—what priorities should central banks have and how should they go about achieving these aims?

Gerald Epstein: Central banks should be free and open, in conjunction with their governments, to identify the key problems facing their own countries, the key obstacles to social and economic development, and developing tools and targets that are appropriate to dealing with those problems. And these are going to differ from country to country. So, for example, in South Africa, my colleague Bob Pollin, James Heintz, Leonce Ndikumana, and I did a study a number of years ago: We proposed an employment-targeting regime for the central bank. The Reserve Bank of South Africa, in conjunction with the government of South Africa, would develop a set of policies and tools—such as credit allocation policies, subsidized credit, lower interest rates, capital controls to keep the capital in the country, more expansionary and targeted fiscal policy—so that monetary policy and fiscal policy would work hand-in-hand to lower the massively high unemployment rate in South Africa. That’s an example of an alternative structure for monetary policy and one that has worked for other developing countries. So, for example, in South Korea in the 1950s ,1960s, and 1970s, the central bank supported the government’s industrial policy—by lending to development banks that would lend to export industries, by subsidizing credit for export industries, and they would do this as part of the government plan to develop the economy. I call this developmental central banking, that is, central banking that in combination with the government is oriented to developing the country using a variety of tools—interest rates, credit allocation tools, etc..

Not all countries would do the same thing. It not only depends on the country, but also on the problems of the historical conjuncture. So take the United States for example. Right now we do have for the Federal Reserve a dual mandate, which some Republicans are trying to get rid of, for high employment and stable prices. But the financial intermediation system is broken because of what happened in the crisis. Interest rates are down to zero but banks aren’t lending to the real economy. People aren’t able to borrow from banks for small businesses and so forth. The Federal Reserve, through quantitative easing, bought a lot of financial assets but it’s probably time for the Fed to develop new tools, to give direct credit to small businesses, for infrastructure development, etc.

It is the case now, with the crisis and with negative interest rates, or very low interest rates, central banks are being much more experimental trying to develop new tools, new approaches. But they’re all doing it under the guise of inflation targeting. European central bankers were doing all these wild monetary experiments, but their goal was really just to get inflation up to 2%. In fact, what’s happening is that this inflation targeting is no longer the guiding post for central banks. They have to him have much broader sets of tools and targets to get out of this terrible slump that most of these economies are in.

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Inversion Acceleration, Part 2

Roger Bybee

Roger Bybee is a Milwaukee-based writer and activist who teaches Labor Studies at the University of Illinois. This is the second part in a three-part article, originally appearing in the May/June issue of Dollars & Sense. Part 1 is available here.

Why Inversions?

The crucial motive in transferring corporations’ “nationality” and official headquarters to low-tax nations is that inversions shield the “foreign” profits of U.S. corporations from federal taxation and ease access to these assets. This protects total U.S. corporate profits held outside the United States—a stunning $2.1 trillion—from any U.S. corporate taxes until they are “repatriated” back to the United States.

Major corporations benefit hugely from the infinite deferral of taxes purportedly generated by their foreign subsidiaries. “If you are a multinational corporation, the federal government turns your tax bill into an interest-free loan,” wrote David Cay Johnston, Pulitzer-Prize winning writer and author of two books on corporate tax avoidance. Thanks to this deferral, he explained, “Apple and General Electric owe at least $36 billion in taxes on profits being held tax-free offshore, Microsoft nearly $27 billion, and Pfizer $24 billion.”

Nonetheless, top CEOs and their political allies constantly reiterate the claim that the U.S. tax system “traps” U.S. corporate profits overseas and thereby block domestic investment of these funds. But these “offshore” corporate funds are anything but trapped outside the United States. “The [typical multinational] firm … chooses to keep the earnings offshore simply because it does not want to pay the U.S. income taxes it owes,” explains Thomas Hungerford of the Economic Policy Institute. “This is a very strange definition of ‘trapped’.”

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After the “Battle of the Century”

What next for debt crisis management?

Bodo Ellmers

Bodo Ellmers is Policy and Advocacy Manager at the European Network on Debt and Development (Eurodad).

In late April, the ‘battle of the century’ between the government of Argentina and a group of vulture funds reached an inglorious end. The government of Argentina finally surrendered and paid the vulture funds in full, at a price tag of more than US $10 billion. The consequences are severe: Argentina started a new cycle of indebtedness; the vulture funds’ predatory business model has been further strengthened and threatens to affect more and more nations; and future debt crisis management in general is in a mess. Now this battle has been lost, the question remains: what next for debt crisis management?

Argentina: back to markets or back to debt crisis?

Argentina had to borrow the money it needed to pay the vultures, thus it returned to financial markets after more than a decade of absence. To the surprise of many financial market observers, the bond issue of the former pariah state was hugely oversubscribed. In the largest emerging market issuance ever, Argentina managed to raise US $16.5 billion in three different bond series that yielded on average 7.2%. This successful return has the caveat that it starts a new cycle of indebtedness. While the government of Argentina hopes that the ‘normalisation’ of financial relations will attract foreign investment, none of these borrowed dollars will be invested productively. The lion’s share of more than US $10 billion went to pay the vulture funds; the smaller share replenished Argentina’s depleted currency reserves, i.e. mainly to refinance capital flight.

The issuance was a perfect deal for investors. It soon turned out that Argentina had sold the bonds too cheaply. Prices surged in the first few days, allowing the banks that were the bookrunners to make quick profits. JP Morgan celebrated: “These yields don’t exist anywhere else in the world in countries with such low levels of debt.”

Argentina’s citizens are paying the price for their government’s strategy of pleasing foreign investors. The recent removal of exchange restrictions has resulted in a 40% currency devaluation and a spike in inflation. Subsidies on essential services have been removed and, by March 2016, 32,000 public service workers had been laid off.

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Inflation Targeting and Neoliberalism, Part 2

Regular Triple Crisis contributor Gerald Epstein is a professor of economics and a founding co-director of the Political Economy Research Institute (PERI) at the University of Massachusetts-Amherst. This is the second part of an interview in which he discusses the rise of “inflation targeting” around the world. The first part is available here.

Alejandro Reuss: Hasn’t it been a central concern on the part of elites in capitalist countries, at least in those where there is representative government, that the majority could impose its will and force policymaker to prioritize full employment and wage growth (as opposed to, say, “sound money”)? Has the transition toward inflation targeting been accompanied by institutional changes to “wall off” monetary policy from those kinds of popular pressures?

Gerald Epstein: Yeah, I think that’s a very important point here. Inflation targeting ideas have also been often accompanied by the idea that central banks should be “independent”—that is, independent from the government. I think you’ll find that these two things go hand-in-hand. If you look at the whole list of central bank rules that the International Monetary Fund (IMF) and others have advocated for developing countries, the argument goes like this: You want to have an independent central bank. Well, what should this independent central-bank do?It should target inflation. Well, isn’t this anti-democratic? No, what we’re really saying is that central bankers should have instrument independence, that is, the ability to decide how they’ll achieve their target, The government should set the target, but what should target be? Well, the consensus is that the target should be a low rate of inflation. So that’s a nice little package designed to prevent the central bank from doing such things as helping to finance government infrastructure investment or government deficits. It’s designed to prevent the central bank from keeping interest rates “too low,” which might actually contribute to more rapid economic growth or more productivity growth, but might lead to somewhat higher inflation.

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Inversion Acceleration, Part 1

Roger Bybee

Roger Bybee is a Milwaukee-based writer and activist who teaches Labor Studies at the University of Illinois. This is the first part in a three-part article, originally appearing in the May/June issue of Dollars & Sense.

Corporate “inversions”—the fast-accelerating phenomenon of major U.S. firms moving their official headquarters to low-tax nations through complex legal maneuvers—are causing an annual loss of about $100 billion in federal tax revenues.

But new rules imposed in early April by the U.S. Treasury Department scuttled the mammoth $162 billion deal between pharmaceutical giant Pfizer and Allergan, based on relocating the official headquarters to low-tax Ireland. The Treasury rules are designed to inhibit “serial inverters”—corporations that repeatedly shift their official headquarters to cut U.S. taxes—and to discourage “earnings stripping,” where firms use loans between their American units and foreign partners to reduce U.S. profits subject to federal taxation. The collapse of the Pfizer-Allergan inversion suggests that the Treasury regulations may constitute a major barrier to some future inversions. However, with firms like Johnson Controls and Tyco moving ahead with their inversion plans, stronger measures will clearly be needed to halt the tide.

U.S. corporations have pulled off about 60 inversions over the last two decades, according to Fortune. In the last five years alone, corporations have executed 40 inversions, the New York Times stated.

This fast-rising dimension of corporate globalization has immense implications for Americans. The industrial powerhouse Eaton Corp. (#163 on the Fortune 500), Medtronic, Accenture (formerly the consulting wing of Arthur Andersen), Burger King, and AbbVie (the world’s 11th-largest drug maker) are among the firms that have repudiated their U.S. nationality and shifted their official headquarters to lowtax nations. The annual toll to the U.S. Treasury from corporate inversions is about $100 billion, based on the studies of Reed College economist Kimberly Clausing. This impact is likely to worsen significantly in the near future. Another dozen or more inversions are currently under consideration, according to conservative New York Times business columnist Andrew Ross Sorkin.

Fortune senior writer Allan Sloan, who has been outraged by inversions despite his overall pro-corporate stance, points to powerful vested interests who stand to gain: “There’s a critical mass of hedge funds, corporate raiders, consultants, investment bankers, and others who benefit from inversions.” (The collapse of the Pfizer-Allergan deal could cost just the major banks as much as $200 million, the New York Times reported.) These interests and their political allies have incessantly claimed that American-based multinational corporations are driven to repudiate their U.S. nationality in order to escape “burdensome” U.S. corporate tax rates that they call “the world’s highest.”

In reality, actual federal corporate taxes on 288 profitable corporations —as distinguished from the official 35% rate almost all firms easily avoid—were actually only 19.4% in the 2008-2012 period, a 2014 Citizens for Tax Justice (CTJ) report revealed. This placed the U.S. 8th lowest among the advanced nations in the Organization for Economic Cooperation and Development (OECD), the CTJ found.

A just-released CTJ study went further in its scope and included state and local taxes as well as federal levies in comparing the U.S. with other OECD countries. It found combined U.S. corporate taxes at 25.7%, ranking 4th lowest in the OECD, based on U.S. Treasury figures. The OECD average is 34.1%. Only Chile, Mexico, and South Korea had a lower total burden as a share of GDP.

Despite this reality of low corporate taxes, a growing number of large multinational firms have concluded that repudiating their U.S. “citizenship” and inverting is the most effective means of cutting their tax burdens, avoiding possible reforms that could potentially hike their tax bills, and most importantly, gaining direct and unregulated access to untaxed “offshore” funds.

The 35% Myth

The fundamental realities of U.S. taxes on multinational corporations are obscured by an elite debate fixated on the official statutory rate of 35%, which is relentlessly cited as a barrier to U.S. competitiveness.

House Republican James Sensenbrenner (R-Wisc.), for example, wrote in a recent Milwaukee Journal Sentinel opinion piece, “The current rate paid by American companies is 35 percent—the highest corporate tax rate among developed countries.”

This narrative—endlessly recited by leading corporate and media elites, along with virtually all Republicans and a number of Democrats, has come to dominate much of the national dialogue. Robert Pozen, a senior fellow at the liberal Brookings Foundation, urgently called for a sharp cut in the 35% statutory rate, claiming broad bipartisan support in Congress. “If there’s one policy agreement between Republicans and Democrats, it’s that the 35% corporate tax rate in the United States should be reduced to 28% or 25%,” he asserted. “The current rate, highest in the advanced industrial world, disincentivizes investment and encourages corporations to relocate overseas.”

Even President Barack Obama, while an outspoken foe of inversions, perversely weakened his own case against them by speaking of “companies that are doing the right thing and choosing to stay here, [and] they get hit with one of the highest tax rates in the world. That doesn’t make sense,” as he told a Milwaukee audience in a typical comment.

Obama has thus inadvertently reinforced the conventional wisdom among U.S. elites that is used to justify inversions, as outlined by John Samuels of the International Tax Foundation. “Today, with most of their income and almost all of their growth outside the United States, U.S. companies have a lot more to gain by relocating their headquarters to a foreign country with a more hospitable tax regime,” declares Samuels. “And conversely they have a lot more to lose by remaining in the United States and having their growing global income swept into the worldwide U.S. tax net and taxed at a 35% rate.”

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Drought But Why

Sunita Narain

Jhabua, late 1980s. This tribal, hilly district of Madhya Pradesh resembled moonscape. All around me were bare brown hills. There was no water. No work. Only despair. I still remember the sight of people crouched on a dusty roadside, breaking stones. This was what drought relief was all about—work in the scorching sun to repair roads that got damaged each year or dig pits for trees that did not survive or build walls that went nowhere. It was unproductive work. But it was all that people had to survive the cursed time. It was also clear that the impact of drought was pervasive and long-term. It destroyed the livestock economy and sent people down the spiral of debt. One severe drought would set back development work for years.

The country is once again reeling from crippling drought. But this drought is different. In the 1990s, it was the drought of a poor India. This 2016 drought is of richer and more water-guzzling India. This classless drought makes for a crisis that is more severe and calls for solutions that are more complex. The severity and intensity of drought is not about lack of rainfall; it is about the lack of planning and foresight, and criminal neglect. Drought is human-made. Let’s be clear about this.

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Inflation Targeting and Neoliberalism

Regular Triple Crisis contributor Gerald Epstein is a professor of economics and a founding co-director of the Political Economy Research Institute (PERI) at the University of Massachusetts-Amherst. In early May, he sat down with Triple Crisis co-editor Alejandro Reuss to discuss the rise of “inflation targeting”—the emphasis on very low inflation, to the exclusion of other policy objectives, in central bank policy-making—around the world. This is the first of three parts.

Part 1

Alejandro Reuss: When we talk about central banks and monetary policy, what precisely is meant by the phrase “inflation targeting”? And how does that differ from other kinds of objectives that central banks might have?

Gerald Epstein: Inflation targeting is a relatively new but very widespread approach to central bank policy. It means that the central bank should target a rate of inflation—sometimes it’s a range, not one particular number, but a pretty narrow range—and that should be its only target. It should use its instruments—usually a short-term interest rate—to achieve that target and it should avoid using monetary policy to do anything else.

So what are some of the other things that central banks have done besides try to meet an inflation target? Well, the United States Federal Reserve, for example, has a mandate to reach two targets—the so-called “dual mandate”—one is a stable price level, which is the same as an inflation target, and the other is high employment. So this is a dual mandate. After the financial crisis there’s a third presumption, that the Federal Reserve will look at financial stability as well. Other central banks historically have tried to promote exports by targeting a cheap exchange rate. Some people have accused the Chinese government of doing this but many other developing countries have targeted an exchange rate to keep an undervalued exchange rate and promote exports. Other countries have tried to promote broad-based development by supporting government policy. So there’s a whole range of targets that, historically, central banks have used.

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When Commodity Prices Fall

C.P. Chandrasekhar and Jayati Ghosh

There was a period in the 2000s when primary commodity prices appeared to have bucked their long term trend of stagnation or decline. As Chart 1 shows, between the trough of December 2001 and the peak of August 2008, the price index for all primary commodities (in US dollar terms) rose by 445 per cent, that is nearly four and a half times.

Chart 1

chandrasekhar and ghosh--commodity prices--fig 1

This increase came after a decade of relative stagnation in nominal dollar prices (which reflected a decrease in relative prices of commodities) over the previous decade. The strength and rapidity of the increase in prices over the 2000s led some analysts to argue that changing patterns of global production and consumption meant that there would be secular tendencies towards increase in such prices in the medium term. In particular, the more rapid growth of and therefore increased demand from China, India and other “emerging markets” was seen to indicate a structural shift in global demand that would generate continued increases in primary commodities prices for some time.

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“Free Trade” In Trouble in the United States

Martin Khor

“Free trade” seems to be in deep trouble in the United States, with serious implications for the rest of the world.

Opposition to free trade or trade agreements emerged as a big theme among the leading American presidential candidates.

Donald Trump attacked cheap imports especially from China and threatened to raise tariffs. Hillary Clinton criticised the Trans-Pacific Partnership Agreement (TPPA) which she once championed, and Bernie Sanders’ opposition to free trade agreements (FTAs) helped him win in many states before the New York primary.

That trade became such a hot topic in the campaigns reflects a strong anti-free trade sentiment on the ground.

Almost six million jobs were lost in the US manufacturing sector from 1999 to 2011.

Wages have remained stagnant while the incomes of the top one per cent of Americans have shot up.

Rightly or wrongly, many Americans blame these problems on US trade policy and FTAs.

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Panama, Secrecy and Tax Havens

Jomo Kwame Sundaram

Unlike Wikileaks’ exposes, the recent Panama revelations were quite selective, targeted, edited and carefully managed. Most observers attribute this to the political agendas of its mainly American funders. Nevertheless, the revelations have highlighted some problems associated with illicit financial flows, as well as tax evasion and avoidance, including the role of enabling governments, legislation, legal and accounting firms as well as shell companies.

The political tremors generated by the edited release of 1.1 million documents were swift. Nobody expected Iceland’s prime minister to resign in less than 48 hours, or that the British prime minister would publicly admit that he had benefited from the hidden wealth earned from an opaque offshore company of his late father.

Panama Papers

The Panama documents are from the law firm Mossack Fonseca, which has worked with some of the world’s biggest banks — including HSBC, Société Générale, Credit Suisse, UBS and Commerzbank — to set up 210,000 legal entities, often to circumvent tax and law enforcement authorities worldwide. Just one law firm in Panama is still the tip of a massive iceberg hidden from public view as many such firms in other locations provide similar services.

High net-worth individuals and corporations thus secure a far greater ability to evade taxes by paying tax advisers, lawyers and accountants. Not surprisingly, Mossack Fonseca insists it has never been accused or charged in connection with criminal wrongdoing, only underscoring that Panama’s financial regulators, police, judiciary and political system are part of the system. Similarly, many clients of such firms claim that they have not violated national and international regulations.

‘Offshore’ Tax Havens

Total global wealth was estimated by a 2012 Tax Justice Network (TJN) USA report at US$231 trillion in mid-2011, roughly 3.5 times global GDP of US$65 trillion in 2011. It conservatively estimated that US$21 to US$32 trillion of hidden and stolen wealth has been stashed secretly, ‘virtually tax-free’, in more than 80 secret jurisdictions, with two thirds in the European Union, and a third in UK-linked sites.

After the Panama Papers leak, Oxfam revealed that the top 50 US companies have stashed US$1.38 trillion offshore to minimize US tax exposure. The 50 companies are estimated to have earned some US$4 trillion in profits across the world between 2008 and 2014, but have only paid 26.5 per cent of that in US tax.

More so now than ever before, the term ‘offshore’ for tax havens refers less to physical locations than to virtual ones, often involving “networks of legal and quasi-legal entities and arrangements”. Private banking ‘money managers’ provide all needed services to facilitate such practices, making fortunes for themselves in doing so. Thousands of shell banks and insurers, 3.5 million paper companies, more than half the world’s registered commercial ships over 100 tons, and tens of thousands of ‘shell’ subsidiaries of giant global banks, accounting firms and various other companies operate from such locations.

Reforming Tax Havens?

In recent years, the global tax-haven landscape has shifted under increased public scrutiny. The OECD (Organization of Economic Cooperation and Development) club of rich nations has been developing a global transparency initiative but Panama is refusing to participate seriously, with the OECD tax chief calling it a jurisdiction “that welcomes crooks and money launderers”.

To get on the OECD’s list of approved jurisdictions, almost 100 countries and other jurisdictions have imposed minimal disclosure requirements. Hence, subject to certain conditions, the Swiss government allows information-sharing about illegal or unauthorized deposits with other countries. Consequently, the flows have moved to new destinations.

Panama, US Exceptions

Only a handful of nations have declined to sign on. After all, many countries and institutions actively enable—and profit handsomely from—the theft of massive funds from developing countries. The most prominent is the US. Rothschild, the centuries-old European financial institution, is now moving the fortunes of wealthy foreign clients out of offshore havens subject to the new international disclosure requirements, to Rothschild-run trusts in Nevada, which are exempt. As Panama is another, a large number of accounts have been moving there as well from other signatory tax havens.

The US does not accept a lot of international standards, and can get away with it because of its economic and political clout, but is probably the only country that can continue to do that. To its own advantage, the US has taken steps to keep track of American assets abroad, but not of foreign assets in the US. In his 5 April speech, following the US Treasury’s crackdown on corporate tax ‘inversions’, US President Obama criticized ‘poorly designed’ laws for allowing illicit money transfers worldwide, and noted that “Tax avoidance is a big, global problem…a lot of it is legal, but that’s exactly the problem”.

Following the Panama revelations, most Western government leaders have pledged tough action against tax evasion and avoidance, especially from developing country locations. But since they receive most of the funds in the tax havens in the world, the OECD has limited its efforts. Hence, these same governments have blocked efforts to give the UN a stronger mandate to advance international cooperation on taxation. Meanwhile, as major users of such facilities, many developing country leaders have been conspicuously silent in the face of recent revelations of what they have long enabled and practiced.

What Can Be Done?

Does it really matter that tax avoidance schemes are legal? Just because they are not illegal does not mean it is not a form of abuse, cheating and corruption. To tackle the corruption at the heart of the global financial system, tax havens need to be shut down, not reformed. ‘On-shoring’ such funds, without prohibiting legitimate investments abroad, will ensure that future investment income will be subject to tax.

If not compromised by influential interests benefiting from such flows, responsible governments should support international tax cooperation efforts under UN auspices and enact policies to:
• Detect and deter cross-border tax evasion;
• Improve transparency of transnational corporations;
• Curtail trade mis-invoicing;
• Strengthen anti-money laundering laws and enforcement; and
• Eliminate anonymous shell companies.

Originally published by InterPress Service News Agency.

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