Tuesday, 15 March 2016

Payrolls Rose in 30 U.S. States in January, Led by Florida

In World Economy News 14/03/2016

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Payrolls rose in 30 states in January and unemployment rates fell in 28, a sign the U.S. labor market was resilient in early 2016.
Florida led the advance with a 32,200 increase in payrolls, followed by Texas with 31,400 more jobs, figures from the Labor Department showed Monday in Washington.

Employers across the country are continuing to hire as the world’s largest economy picks up pace this quarter, helping to sustain household spending and cushion headwinds including weakness in the oil industry and a slowdown in overseas markets. Federal Reserve policy makers, meeting this week, have taken note of the progress on employment.
“The labor market should remain pretty solid,” Scott Brown, chief economist at Raymond James Financial Inc. in St. Petersburg, Florida, said before the report. “Businesses still need to hire. We’re still mopping up the slack.”
Vermont showed the biggest percentage gain in employment in January with a 0.9 percent advance, followed by Nevada with a 0.6 percent increase. The District of Columbia, which is included in the state report, also showed a 0.9 percent rise.
South Carolina posted the biggest percentage decrease, showing a 0.5 percent drop.

Unemployment Rates
Ten states showed statistically significant decreases in the unemployment rate in January, with Oregon reporting the biggest decline of 0.4 percent point to 5.1 percent. The only statistically significant increase was in Wyoming, where joblessness climbed by 0.3 percentage point to 4.7 percent.

South Dakota tied North Dakota for the lowest unemployment rate in the nation, at 2.8 percent. Mississippi had the highest, at 6.7 percent.
Even with the lingering woes in the oil industry in Texas, the state’s jobless rate decreased to 4.5 percent in January from 4.6 percent in the previous month.

State and local employment data are derived independently from the national statistics, which are typically released on the first Friday of every month. The state figures are subject to larger sampling errors because they come from smaller surveys, thus making the national figures more reliable, according to the government’s Bureau of Labor Statistics.
The national report, released on March 4, showed the job market has stayed strong so far this year. U.S. payrolls climbed by 242,000 in February following a 172,000 rise in January. The jobless rate held at an eight-year low of 4.9 percent as people entered the labor force and found work. Average hourly earnings fell, the first monthly drop in more than a year.
The February state employment data will be published on March 25.


Source: Bloomberg

In a relief for Fed, U.S. inflation survey rebounds

In World Economy News 14/03/2016

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An increasingly important gauge of U.S. inflation rebounded last month from record low levels, adding to other firming price measures that could help pave the way for Federal Reserve interest rate hikes in the months ahead.
The New York Fed’s survey of consumers found expectations for inflation one year in the future rose to 2.71 percent in February, from January’s 2.42 percent, which was the lowest level since the survey began in mid-2013.
Median expectations three years in the future edged up to 2.62 percent last month, from 2.45 percent.
Both measures remain close to the low end of the history of the internet-based New York Fed survey, which taps a rotating panel of 1,200 household heads and is done by an outside organization.
While the Fed lifted rates from near zero in December, a global market selloff and worries over falling inflation means policymakers will likely hold off any further tightening at a meeting this week. In recent weeks, however, price measures have firmed and investors have increasingly predicted another rate hike by mid year.
In further good news for the U.S. economy, expected one-year-ahead earnings growth rebounded to 2.5 percent in February after falling the previous two months, the survey found. Gauges of Americans’ expected income and spending growth also rose last month.

Source: Reuters (Reporting by Jonathan Spicer; Editing by Meredith Mazzilli and Andrea Ricci)

Fed to sit tight on rates at March meet, hint at hikes to come

In World Economy News 14/03/2016

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The Federal Reserve won’t raise interest rates this week, but will likely make clear that as long as U.S. inflation and jobs continue to strengthen, economic weakness overseas won’t stop rates from rising fairly soon.
That will be a big change from the last time the Fed met, when uncertainty over the impact of slower growth in China and Europe drove policymakers to signal it would stay on hold until it could make a better call on the outlook.
That in turn was a setback from just a month earlier, when the Fed raised rates for the first time in nearly a decade and seemed ready to move four more times this year.
This week, fresh forecasts from the Fed’s 17 officials released after the meeting will almost certainly signal a retreat from that pace, to perhaps two or three rate hikes this year, economists predict and Fed officials themselves have suggested.
But the expected downgrade may largely reflect the drag from the oil and stock market slide in January and the Fed’s decision then to put policy on hold, rather than mounting worries over the U.S. or global outlook.
Indeed, since the last Fed meeting U.S. inflation has shown signs of stabilizing, with one measure published by the Dallas Fed rising to 1.9 percent, its closest to the Fed’s 2 percent goal in 2-1/2 years. Meanwhile, the U.S. unemployment rate held at 4.9 percent in February, near the level many Fed officials believe represents full employment.
The European Central Bank’s decision last week to ease policy further may help add to confidence that action has been taken to underpin growth in Europe, helping ensure a stalling of global growth drag on the U.S.
That could mean another U.S. rate hike by mid-year and, depending on economic data, more to come after that.
“June seems certainly like a possibility” for the Fed’s next rate hike, said former Minneapolis Fed President Narayana Kocherlakota, whose own preference is for the Fed to take out “insurance” against a recession by cutting rates back to near zero. Market-based inflation expectations have improved somewhat since the Fed’s last meeting, he said, “a real positive” development.
INFLATION DEBATE
Still, Kocherlakota’s former colleagues will likely spend plenty of time discussing the inflation outlook. That much was clear last week, when two top Fed officials, speaking simultaneously at separate Washington events, gave diverging assessments of recent evidence of rising prices.
More hawkish rate setters worry that if the Fed does not act to preempt inflation, it could end up behind the curve and lose credibility, while the more dovish members believe the economic recovery is still fragile and want to see firm evidence of inflationary pressures.
“That’s probably internally the biggest grounds for debate,” said Regions Financial Corporation economist Richard Moody.
The Fed will also need to tackle how to characterize the “balance of risks” to their baseline outlook, he said, particularly if policymakers want to keep the door open to rate hikes in April or June.
“If they truly want the markets to believe that all the meetings are on the table (for a potential rate hike) then I would think they have to have something in there,” Moody said, predicting they will characterize risks as “nearly balanced,” the same phrase they used before December’s rate hike.
And yet, others say, Fed Chair Janet Yellen will be wary of sending too strong a signal of coming rate hikes, for fear of roiling markets.
“By June they will have a broad clutch of data and that could help them, and even some of the doves the Federal Open Market Committee, to come to a solid conclusion (on the desirability of a rate hike) and a conclusion, by the way, that the market agrees with,” said Quincy Krosby, a market strategist for Prudential Financial.
Source: Reuters (Reporting by Ann Saphir; Editing by Meredith Mazzilli)

Insight – Bank of Japan scrambles to find positives in negative rates

In World Economy News 15/03/2016

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Bank of Japan (BOJ) officials have been scurrying to commercial banks to explain and apologise for its surprise adoption of negative interest rates in January, while Prime Minister Shinzo Abe has distanced himself from a decision that is proving unpopular with the public.
Some officials close to the premier say it could cause a rift in his once close relationship with BOJ Governor Haruhiko Kuroda, whose radical stimulus measures have so far failed to lift Japan clear of two decades of deflation and stagnation.
A government press relations official said there was nothing to add beyond remarks made publicly by Chief Cabinet Secretary Yoshihide Suga that no such rift exists. A BOJ spokesman declined to comment.
With the economy shrinking again and prices flat, Abe has already announced he will set up a panel to consider fresh budget spending to provide the stimulus that monetary policy has struggled to achieve.
The controversy over the negative rates move, which unlike his previous eye-catching policy steps was not welcomed by Japan’s stock market, comes even as Kuroda is on the verge of gaining greater control of the bank’s nine-member board. Two sceptics of his stimulus programme are stepping down in the coming months.
The diminishing returns from his preferred modus operandi of market-shocking measures will leave him little option but to revert to the drip-feed easing he derided in his predecessor Masaaki Shirakawa if inflation fails to pick up, some analysts say.
“Given the confusion caused by the January move, I don’t think the BOJ will be able to cut rates again for the time being,” said Hideo Kumano, a former BOJ official who is now chief economist at Dai-ichi Life Research Institute.
“The BOJ may instead expand asset purchases in small instalments. That would be returning to the incremental approach of easing Kuroda dismissed in the past as ineffective.”
TABLOID WARNINGS
Mandated by Abe to transform the risk-shy BOJ, Kuroda delighted markets and silenced sceptics within the bank by deploying a massive money-printing programme, dubbed “quantitative and qualitative easing” (QQE), in April 2013.
The Tokyo stock market soared and the yen tumbled, giving exporters a boost, and Japanese growth and inflation registered a pulse.
He struck again in October 2014 with a big expansion of QQE, though the market boost was smaller, price rises were already moderating and the economy was taking a step back for every step forward.
But the late-January rates decision failed to reverse a rise in risk-aversion that was hitting stocks and forcing up the yen, traditionally a safe haven in times of market stress.
Bank shares fell sharply.
Like Shirakawa, who faced frequent grilling by lawmakers for doing too little too late to beat deflation, Kuroda is now summoned to parliament almost daily. Opposition lawmakers brand negative rates a policy failure that confused, rather than calmed, jittery financial markets.
Tabloids warned people to defend their deposits from the risk of a bank run, while talk shows ran features on the threat to family savings.
Abe, who used to praise Kuroda’s BOJ for taking bold steps to eradicate deflation, distanced himself from the policy, telling parliament on March 7 that the decision was “of the bank’s own making”.
Masahiko Shibayama, an adviser to Abe, said there had been “quite a bit of confusion” in markets.
“I hope the BOJ calmly analyses the impact negative interest rates have had, which should feed into their decision about the next steps to take,” he told Reuters this month, signalling the administration’s distaste for further cuts.
Sources told Reuters the BOJ was set to discuss exempting some funds from the negative rates, after the securities industry warned that investment money would be driven into bank deposits, which would not help Abe’s hopes of getting cash put to more productive use to boost the economy.
APOLOGIES
Except for an elite handful, even BOJ officials were left in the dark about the January decision.
Many officials are now being kept busy defending the policy to lawmakers and private banks furious that Kuroda deployed the “shock and awe” tactic just days after denying such a move was a possibility.
Top BOJ executives are visiting the big banks to brief them on negative rates, a reversal of the normal course of events, which would usually see private bankers visiting BOJ headquarters, say officials with direct knowledge of the matter.
Outside of Tokyo, BOJ branch managers are holding meetings with regional banks to calm executives angered by the impact that negative rates are having on their already slim lending margins.
“The first thing we do is to apologise for the confusion,” said one BOJ branch manager. “The scene isn’t nice.”
Banks, brokers and officials say some financial institutions are having to manually enter orders as their computer systems can’t yet handle negative-rate transactions.
While many BOJ officials are wary of expanding monetary stimulus again soon, their hands may be forced as soft domestic consumption and global demand threaten to derail a fragile economic recovery.
The BOJ is set to cut its growth and price forecasts again at a quarterly review in April, sources have told Reuters, which would heighten calls for more stimulus.
Kuroda has said that negative rates combined with QQE give the BOJ more powerful weaponry, but the likelihood is that he will be unable to deliver much of a blast from either barrel.
January’s action has queered the pitch for further rate cuts, and his scope for stimulating the economy by acting in the bond markets – the main mechanism for QQE – is limited, analysts say, because the central bank is already gobbling up a quarter of the entire Japanese government bond (JGB) supply.
“QQE was intended to deliver all available steps in a single blow, which means the BOJ really doesn’t have many tools left in the first place,” said Izuru Kato, chief economist at Totan Research and a long-time BOJ watcher.
“The BOJ will probably keep saying that there’s plenty of room to ease more,” said one source familiar with the bank’s thinking. “But there are clearly limits to what monetary policy alone can do.”
Source: Reuters (Additional reporting by Yoshifumi Takemoto and Sumio Ito; Editing by Will Waterman)

ECB’s Cheap Loans Highlight Rift Among Europe’s Banks

In World Economy News 15/03/2016

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The European Central Bank’s decision to offer eurozone financial institutions cheap four-year loans offers fresh hope to struggling banks in Southern Europe–and has drawn immediate ire from their Northern European rivals.
The loans allow eurozone banks to borrow at no cost for up to four years. Many banks in Italy, Spain and the region have struggled to clean up bad loans and maintain investor confidence.
But in Germany, where banks sit on more cash than they can productively deploy, the industry lashed out at the loan program and other aspects of the ECB’s monetary-policy decision. German financiers said the moves were unnecessary and could undermine German investments, insurance and retirement plans.
ECB President Mario Draghi addressed such concerns by saying Thursday that it was unlikely interest rates would fall further.
Investors, foreseeing immediate help for all eurozone banks, bid up lenders’ shares Friday. Spain’s Banco Popular EspaƱol SA surged almost 13%, Italy’s UniCredit SpA leapt 9.5% and Germany’s Deutsche Bank AG, which faces internal restructuring problems, jumped 7.4%.
For bankers, though, the dispute highlights afresh the lingering gap between lenders in the continent’s generally healthy north and a south that struggles with debt and high unemployment. This represents one of many conundrums in creating a one-size-fits-all monetary policy for the 19-country eurozone.
The ECB on Thursday rolled out a six-pronged plan to boost weak inflation to its target of just below 2% and increase bank lending in the eurozone. The ECB also said it would cut all of its key interest rates, pushing its core deposit rate further into negative territory. The move means commercial banks with excess funds–which are mainly those in the north–must pay even more to park cash at the central bank.
The ECB also announced a fresh program of targeted, longer-term loans to banks, which can now even be paid to lend to the eurozone’s private sector. The ECB added corporate bonds to the mix of assets it can buy as part of its large-scale asset-purchase program, a policy known as quantitative easing. The ECB also increased its monthly bond purchases by EUR20 billion ($22.30 billion), to EUR80 billion.
A German trade group representing commercial banks including Deutsche Bank and Commerzbank AG criticized the ECB’s moves to pump more money into the economy. The association, BdB, accused the central bank of overstating “deflationary risks.”
Germany’s association of savings banks also opened fire, saying the ECB measures hurt not only savers and banks but endowments, pensions, social-security schemes and insurers.
“These measures are above all aimed at financial institutions in crisis in Southern Europe, which could use favorable refinancing,” said Michael Wolgast, the chief economist at the savings-bank association, DSGV. The longer-term loans “aren’t necessary for monetary policy and they will not have an effect on the real economy,” he said.
Bankers aren’t the only Germans upset. The front page of business daily Handelsblatt’s Friday edition depicted Mr. Draghi lighting a cigar with a burning EUR100 bill. “Mario Draghi’s dangerous game with the money of German savers,” read the caption, and “Whatever it takes” beneath, a sarcastic allusion to Mr. Draghi’s statement in London nearly four years ago promising to do “whatever it takes” to save the euro.
Experts say the ECB’s package of measures was a victory for banks in the eurozone’s embattled south, which can access cheap funding for loans.
“Italian banks are much more old-fashioned commercial banks that make money from loans,” said Luca Paolini, chief strategist at Pictet Asset Management. “The ECB decision…is a positive because [the targeted loans] are on very generous terms and will go a long way to offset any negative impact of falling deposit rates.”
Southern European banks are more dependent on central-bank funding and are less rich in deposits than their German peers. Data compiled by Dutch lender Rabobank Group show that as of January the top borrowers from regular ECB loans were banks from Italy and Spain. German banks, in contrast, had the highest level of central-bank deposits.
The ECB itself doesn’t disclose this information. Ample deposits mean that German banks are well-insulated from any capital flight.
Data provided by the ECB show that the cost of borrowing for German firms stood at 1.98% in January, down 22% from their level in June 2014, when the ECB first pushed borrowing rates into negative territory. Comparable rates in Italy in January stood at 2.47%, down 32% from June 2014
The ECB’s decision Thursday is “going to hurt banks that have a lot of excess liquidity” said ING economist Carsten Brzeski, citing German savings banks. “These are the ones being hurt by the negative deposit rate.” He said these banks need to park excess funds somewhere, “so they park it at the ECB.”
These lenders also aren’t helped by the ECB’s targeted four-year loans, he said. “Why would you now pick up more excess liquidity if you already are having trouble getting rid of your excess liquidity?”


Source: Dow Jones

Euro-Area Industrial Production Surges Most Since 2009

In World Economy News 15/03/2016

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Industrial production in the euro area opened 2016 with its strongest monthly performance in more than six years, boosted by energy and capital goods.
Output jumped 2.1 percent in January from December, helped by growth in Germany, France and Italy, the Eurostat statistics office in Luxembourg said on Monday. From a year earlier, production rose 2.8 percent, the biggest annual jump since 2011.
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Economists surveyed by Bloomberg earlier this month forecast euro-area growth of 0.4 percent this quarter and next, up from 0.3 percent in the final three months of 2015. While inflation remains far below the European Central Bank’s goal, prompting policy makers to ramp up stimulus yet again last week, the economy’s performance has been relatively consistent in recent quarters.
The monthly increase in production in January was the biggest since September 2009 and exceeded the 1.7 percent median forecast of economists. Howard Archer, an economist at IHS in London, said while the numbers give a “serious boost” for the first-quarter growth outlook, surveys suggest a weaker February. Markit’s manufacturing Purchasing Managers Index fell to the lowest in a year last month.
“Anyone that has been following the news regarding the ECB decision to expand QE recently must have gotten the idea that the eurozone economy is in terrible shape,” said Bert Colijn, an economist at ING in Amsterdam. “While inflation is indeed far from the ECB target, the performance of the eurozone economy has not been all that bad.”


Source: Bloomberg

The Great OK: U.S. economy muddles along

In World Economy News 15/03/2016

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U.S. interest rates remain extremely low and that can only mean one thing: The economy isn’t growing fast enough to justify making it more expensive to borrow.
The Federal Reserve is expected to stand still and leave interest rates unchanged after bank VIPs meet this week. Nor are any of the economic reports on a busy calendar likely to give them any reason to act differently.
Retail sales in February, for example, are forecast to turn negative. A pair of surveys of American manufacturers are likely to remain under water. And inflation shows little sign it’s about to soar — what would be a sure sign of an economy catching fire.
Instead the economy has caught a bit of a chill. Growth softened to 1% in the final three months of 2015 and the new year has gotten off to a plodding start. The U.S. probably will grow faster in the first quarter, but economists are forecasting a mild 2.3% advance in gross domestic product.
Chief economist Robert Dye of Comerica Bank calls the current era “The Great OK.”
Yes, the economy is growing at a 2% pace. And yes, the economy is producing a healthy 200,000-plus jobs a month, which has knocked the unemployment rate down to an eight-year low of at 4.9%.
Yet the U.S., seven years into a recovery, is also experiencing the weakest rebound since World War II. The economy has expanded historically at a 3.3% pace, but the U.S. hasn’t topped 3% since 2005. Missing from the current expansion has been the explosive 4%-plus gains in GDP that typically happen early on.
“Even though things are unquestionably better today than they were five years ago, the economy is not great,” said Stephen Stanley, chief economist at Amherst Pierpont Securities.
Part of what’s holding the economy back is slow wage growth and stagnant household incomes.
The falling unemployment rate has forced some companies to raise wages to attract workers, but the gains are not widespread. A study by Deutsche Bank found that only about one-third of industries have been forced to raise wages by at least 3%.
Most workers are only getting a bump in pay of 2% or less — far less than the typical wage gain in a strong economy. And millions of Americans are still stuck in part-time jobs or can’t find full time work. Many have even dropped out of the labor force entirely.
Businesses, for their part, find it hard to raise prices and a recent survey of small businesses show that most are swallowing higher labor costs. Lower profits in turn leave them little incentive to boost investment, the key to stronger economy.
The difficulty faced by most companies in raising prices also helps explain why inflation is still well below the 2% level the Fed believes would be healthier for the economy. It’s not just tumbling prices of oil and other imported goods that are keeping inflation low.
Fed officials insist inflation will rise gradually from current low levels and to some extend that’s already happening. Rising costs of housing and medical care are main culprits.
If that keeps up, the central bank is expected to raise interest rates at least once this year, perhaps as early as summer. But just three months ago the Fed was signaling as many four interest-rate hikes in 2016.
Call it, as Dye does, The Great OK. The U.S. is creating enough jobs and growth to warrant the occasional increase in interest rates. But 2% or so growth is perhaps the best the economy can do.


Source: MarketWatch

Fitch: ECB Eases Beyond Expectations, Bank Impact Limited

In World Economy News 15/03/2016

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The monetary easing announced by the European Central Bank on Thursday had some unexpected components, in particular the new ‘TLTROII’, but it is unlikely to provide a significant boost to the subdued eurozone recovery, Fitch Ratings says. This assumption is reflected in our latest eurozone growth forecast, which sees the bloc’s real GDP expanding by 1.5% for the second consecutive year in 2016.
The ECB cut its deposit rate by 10bp to minus 0.4% and expanded its quantitative easing programme, increasing monthly purchases to EUR80bn and including investment-grade corporate bonds. Cuts to the deposit rate and QE expansion were in line with our expectations, but the ECB also cut the main refinancing operation (MRO) rate by 5bp to zero. We had forecast that the MRO would be unchanged.
Four targeted longer-term refinancing operations (TLTRO II) will start in June. Borrowing rates on these four-year facilities could be as low as the interest rate on the deposit facility, if banks exceed certain lending benchmarks.
The ECB’s action has no impact on bank ratings. Very low interest rates are already making it more difficult for banks in the eurozone to sustain profitability and return on equity remains well below pre-crisis levels. Net interest margins are unlikely to see a material improvement until either competition eases or more banks pass on negative rates to their customers. Most are reluctant to consider this, but the longer the period of negative rates continues, the more earnings come under pressure.
We do not believe Thursday’s measures will have a major additional impact on banks’ profits or their willingness to lend. Taken as a whole, at EUR200bn at end-2015, eurozone commercial banks’ excess reserve deposits at the ECB are still a small share (0.7%) of their total assets. Even if they rose to EUR500bn due to QE, and the deposit rate were cut further to minus 0.5%, the annual cost to the eurozone banking sector would be EUR2.5bn, or around 5% of its total 2015 profits. Similarly, taking the MRO 10bp into negative territory would have an annual cost to the sector of around EUR0.5bn via remuneration on required reserves.
The impact on banks will vary. Those with customer deposits and long-term funding that exceed their opportunity to extend lending at viable rates of return are more exposed than those whose loans-to-deposits and long-term funding ratios remain above 100%. The former are more likely to charge for customer deposits or impose negative rates. The availability of cheap funding via the TLTROs would benefit participating banks’ net interest margins if earnings are not dragged down by surplus funding and liquidity, and they are able to extend TLTRO funding to lend at reasonable margins, taking risk into account.
The existing stock of floating-rate lending at rates linked closely to central bank rates will be a drag on earnings and the benefits of long-term fixed rate loans priced when ECB rates were higher will erode if low or negative central bank rates persist and higher rate lending is repaid.
The ECB expects inflation to remain negative in the coming months before picking up later this year. We think its willingness to loosen monetary conditions to keep long-term inflation expectations anchored is one reason the eurozone can avoid prolonged deflation. However, the market moves following the announcement and ECB president Mario Draghi’s subsequent comments highlights the potentially volatile reactions to central bank communications, which can have an impact on the effectiveness of policy measures.


Source: Fitch Ratings

Monday, 14 March 2016

Should the U.S. adopt a value-added tax?

In World Economy News 14/03/2016

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In discussions about changing the U.S. tax system, one topic almost always arises: the possibility of adopting a value-added tax.
After all, most of the industrialized world uses a VAT — which is not to say they all like it.
Unlike a traditional sales tax, a VAT is a levy on consumption that taxes the value added to a product or service by businesses at each point in the chain of production. Businesses along the chain collect the tax and send it to the government, which supporters say is a boon for the efficiency of revenue-collection efforts. But ultimately, it is the consumer who pays the tax, because the final price of the goods and services they buy reflects all of the taxes that have been charged up to that point. The taxes are all baked into the retail price.
In this way, a VAT taxes what people consume rather than how much they earn. But this is also a reason why some consider a VAT to be unfair—because, the critics say, the burden of taxation falls disproportionately on those with lower incomes.
Supporters of a VAT, meanwhile, say it is better for economic growth than an income tax because it doesn’t tax savings or investment. And governments like it because it tends to bring in more revenue, thanks in part to the role that businesses play in its collection. Incentivizing their efforts, businesses receive credits for the VAT they pay.
Arguing that a VAT can be good for governments and for the economy is Michael J. Graetz, a professor of law at Columbia Law School and author of “100 Million Unnecessary Returns: A Simple, Fair, and Competitive Tax Plan for the United States.” Taking the view that a VAT encourages wasteful government spending is David R. Henderson, an economics professor at the Naval Postgraduate School and a research fellow with the Hoover Institution.
Yes: It is fair and simple, and would spur economic growth
By Michael J. Graetz

For decades after World War II, even a horrible tax system (with a top individual income-tax rate of 91% and corporate rates above 50%) could not keep the U.S. from achieving robust economic growth and widespread prosperity.
A generation later, Ronald Reagan’s 1986 tax overhaul lowered income-tax rates. But it didn’t take long before that reform unraveled.
Now, our income tax is badly broken, and astounding complexities abound. In 1987 our tax rates on businesses were among the lowest in the world; today they are the highest. How can anyone remain optimistic about repairing our tax system without radical surgery?
Different path
What our nation needs is a fair and simple tax structure that is conducive to economic growth and that better positions U.S. workers and businesses to compete in today’s slow-growth global economy. We are hobbled by our heavy reliance on income taxation. The rest of the world has taken a very different path.

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While the U.S. is a low-tax country compared with other nations in the Organization for Economic Cooperation and Development, other developed countries get nearly a third of their take by taxing consumption—through value-added taxes—while we get less than 18%, virtually all from state and local sales taxes.
Serious tax reform needs to replace income taxes on businesses and individuals with a value-added tax on sales of goods and services collected at all stages of production. Today, more than 160 countries have a VAT. The U.S. is the only OECD country that doesn’t.
This would free more than 150 million Americans from ever having to file tax returns or deal with the Internal Revenue Service. And it would enable us to cut our corporate income-tax rate to compete with the lowest in the world without shifting the tax burden away from those who can most afford to pay.
A VAT would also spur economic growth, increasing U.S. GDP by as much as 5% in the long run, compared with proposed income-tax changes that would increase GDP by far less.
Shifting taxes from production to consumption would stimulate jobs and investments and induce companies to base headquarters here rather than abroad. Taking the additional step of taxing imports and exempting exports would yield hundreds of billions of dollars for the U.S. Treasury in the decade ahead.
Collection optional
Unlike the income tax, with its exclusions, deductions and credits, we could apply VAT at a single rate to a broad base of goods and services. Like Canada’s VAT, the amount of tax on each purchase should be stated on customers’ receipts. And for 90% or more of businesses, all small businesses, collection should be optional. Before the retail level, the tax just gets collected at the next stage, based on the higher price. And even if a retailer opts out, the amount of tax forgone is modest compared with the VAT already collected at earlier stages.

Former Treasury Secretary Lawrence Summers said Republicans don’t like value-added taxes because they are a “money machine” and Democrats don’t like them because they are regressive. We will get a VAT, he said, when Democrats realize that it is a money machine and Republicans realize that it is regressive.
To the contrary, we will get a VAT only as part of a major tax reform designed to ensure that it is neither regressive nor a money machine. The potential for regressivity should be addressed for low- and moderate-income households by eliminating payroll taxes and through debit cards which cancel taxes at the cash register.
Done right, a VAT would enable us to restructure our tax system to produce greater economic growth and more jobs, fairly, and at far lower costs. For the vast majority of Americans, April 15 would be just another spring day.
No: It makes it too easy for the government to raise money
By David R. Henderson

Many economists who study tax systems do not concern themselves with the issue of government spending. Focusing simply on how the government collects its revenue, they often argue that a value-added tax, which taxes consumption, is more efficient than the alternatives. One main reason they give is that a consumption tax avoids the multiple taxation of saving that occurs now under our tax system. Our current system taxes interest and dividends that people earn on their savings, and taxes capital gains.
But another efficiency—this one from the revenue collector’s perspective—is that a VAT makes it easier to increase revenue. And that is the part we should balk at.
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The evidence is strong that a VAT makes it easier for the government to tax more. The VAT is, in short, a revenue machine for big government. All other things being equal, the higher taxes are, the lower economic growth is. Moreover, higher taxes, even if they didn’t hurt growth, would put more money in the hands of government, which spends more recklessly and wastefully than we spend our own money.
Europe’s experience
Take Europe, where the VAT is a major source of government revenue. When Belgium, France, Germany, Ireland, Italy and the Netherlands adopted a VAT — all between 1968 and 1971 — their stated revenue goal was neutrality: Gains in revenue from the VAT were to be fully offset by reduced taxes elsewhere. (France already had a VAT but needed to revise it to meet European Economic Community Standards.)

All failed. Government revenues — and spending — rose substantially as a percentage of GDP. In 1967 in France, the year before that country adopted its EEC-compliant VAT, total government revenues were 33.4% of GDP. In 1968, France adopted a VAT rate of 13.6%. By 2014, its VAT rate was 20% and government revenues were a whopping 45.2% of GDP. When Britain adopted a VAT, the government’s stated goal was to reduce revenue. That failed, too. Only one country, Denmark, adopted a VAT to increase revenues. It succeeded.
Why does a VAT make it easier for government to raise revenue?
One possible reason is that a VAT is nearly invisible. When you pay for an item and don’t see the tax itemized on your receipt, you may not be aware of how big the tax is. And VATs tend to be hidden. Ironically, another possible reason VATs have led to government growth is that because VATs are more efficient at raising revenue, governments are tempted to raise VATs. Whichever explanation is correct, the sad truth is that VATs are not an engine of economic growth but, rather, an engine of government growth.
Make it visible
Is there a way not to have the VAT be an engine of government growth? There is only one I can think of: insisting that a VAT or similar consumption tax be highly visible. But then any government that implements a large transparent VAT is likely to be defeated. That’s what happened in Canada. In 1991, Prime Minister Brian Mulroney, head of the Progressive Conservatives, imposed a fully transparent 7% sales (consumption) tax. In the next election, his party lost nearly all of its 151 seats—the biggest rout in Canadian parliamentary history. The hugely unpopular sales tax was a major contributor.

One further problem with a VAT is that it would take a much higher percentage of income from lower-income people than the current tax system does. A way around that is to send checks to lower-income people who apply. The checks would be so large, though, that fraud would be substantial.
In short, the VAT is a bad idea.


Source: Wall Street Journal

EU to propose returning some VAT-setting powers to states – draft

In World Economy News 14/03/2016

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The EU might hand back powers to cut some VAT sales tax rates, a draft plan seen by Reuters shows, a move especially resonant for Britain, where complaints about centralised control from Brussels have prompted a referendum on EU membership.
The draft underlined that Britain would retain its right to apply a zero rate of VAT, an entitlement that it shares with other older member states but which London is unusual in using so widely, notably on food and medicine. It may also solve a row over “tampon tax” there.
Expected to be made public next week, the EU document said: “VAT needs to be modernised and rebooted.”
Among a number of legislative actions it proposes for this year and 2017, the document says states might be given the power over what is taxed at reduced rates. That is now set up to a minimum of 5 percent and the Commission has the say on an EU-wide list of items eligible for such low rates.
If approved, the new rules would give governments either greater say in drawing up that EU list or the list would simply be scrapped. The more ambitious option would grant EU states “greater freedom on the number of reduced rates and their level”, the draft said.
This may allow Britain to reduce below 5 percent the VAT on sanitary products, which existing rules prohibit.
The document also ends doubts over the future of zero-rate VAT after Economics Commissioner Pierre Moscovici, a former French finance minister, said in January he disapproved of it. In any case, governments have a veto on EU tax matters.
The Commission warned that governments, already strapped for cash, could hurt revenues by yielding to pressure to cut VAT. The tax raises nearly 1 trillion euros (£770 billion) a year in the 28 EU countries, amounting to 7 percent of EU GDP.
To counter widespread VAT fraud on trades between EU countries, the Commission also proposes that countries where goods are produced collect tax on behalf of the countries where they are sold.
That would require more cross-border cooperation and might add to red tape but could cut by 80 percent an annual 50 billion euros lost to fraud in cross-border trade, the EU Executive estimates in the document.
Source: Reuters (Editing by Alastair Macdonald and Louise Ireland)

ECB Dust Settles to Reveal Unshaken Policies in Emerging Europe

In World Economy News 14/03/2016

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While tremors shook Europe’s emerging markets after Mario Draghi announced new monetary stimulus on Thursday, the region’s central banks will stick to their guns on how they’ll tackle policy this year.
Investors increased bets on more monetary easing from Warsaw to Budapest after the European Central Bank cut borrowing costs and extended its asset-buying program. They quickly reversed, however, after Draghi said he didn’t see a need to lower interest rates further, decoupling the region’s assets from other emerging markets.
The ECB president effectively quashed concern that Polish, Hungarian and Czech assets — which offer higher returns than negative-yielding euro counterparts — would attract inflows that would drive down inflation that’s already below target across the region. While many economists had earlier predicted the need for monetary easing across eastern Europe, the consensus now shows little deviation from the policies that prevailed before the ECB met.
“I don’t think it’s fundamentally changed anything,” William Jackson, from London-based Capital Economics, said by phone on Friday. “Further ECB easing was expected to some extent and each policy board and their relative dovishness or hawkishness will determine whether there will be further easing or if they’ll just keep their policy loose.”
Poland was the first to take pass at reacting on Friday, as policy makers left the main rate unchanged at 1.5 percent. But that doesn’t mean that everyone will stand pat. Hungary’s central bank, which vowed last year to keep its benchmark rate unchanged through the end of 2017, will probably resume cutting from the record-low 1.35 percent, Vice Governor Marton Nagy said Thursday before the ECB decision. The bank, which holds its next rate meeting March 22, will adjust its interest-rate corridor “imminently,” he said.
Swinging Expectations
Market bets illustrated there’s little need for damage control. While some currencies surged, emerging Europe underperformed other regions. The forint has weakened 0.4 percent against the euro in the past two days while the leu and the koruna have been little changed and the zloty is up 0.2 percent. The ruble and South Korean won, which mainly trade against the dollar, have rallied at least 1 percent in the period.
Forward-rate agreements, which investors use to bet on future borrowing costs, erased a jump in expectations of further rate easing on Thursday. They indicated that Hungary would cut by 33 basis points and Poland by 29 basis points by December, little changed from levels two days ago. Czech FRAs signaled 17 basis points of reductions, compared with 26 basis points the day before the ECB move.
Polish Newcomers
Poland’s Monetary Policy Council didn’t budge Friday as it sat for the first time this week after eight of its 10 members were replaced. The council last cut the rate by half a point to a record low a year ago and then deferred any action to its newly constituted successor. Policy makers there perused new inflation and GDP projections and must balance the prospect of easing with the impact it may have on the financial sector.
“The new MPC is in a difficult situation at the start of its term,” Maciej Reluga, chief economist at Bank Zachodni WBK, said by phone. “Meeting the inflation target sets the case for more rate cuts, while worries about the financial stability say rate show cuts as possibly dangerous.”
To the southwest, the Czech central bank has been intervening in the market since July to prevent the exchange rate from gaining beyond its Swiss-style cap at around 27 per euro, imposed in 2013 to avert deflation. Rates setters in Prague have repeatedly questioned whether negative rates would be useful and Vice Governor Mojmir Hampl said the ECB’s move wouldn’t prompt a shift in Czech policy.
“The overall mix of these measures doesn’t for now, in my personal opinion, dramatically change the situation for our further monetary policy considerations and the decision at the end of March,” Hampl told newspaper Lidove Noviny on Friday.
Romania, which has the highest key rate in the region at 1.75 percent, is already “divergent” from the ECB because of accelerating inflation, Lucian Croitoru, monetary adviser to Governor Mugur Isarescu, said Thursday by phone. Isarescu himself said a period of tax-induced deflation may prompt his board to actually tighten its policy “sooner than expected.”
“We’ll soon be in a position similar to that of the FED in relation to the ECB, we’ll be in a tightening mode,” Croitoru said. “It’s not a major problem that we’re out of sync.”


Source: Bloomberg

There’s a Potential Problem with the ECB’s Plan to Buy Corporate Debt

In World Economy News 14/03/2016

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Is this the chart that sparked a thousand monetary stimulus measures?
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Analysts at Bank of America Merrill Lynch argue that despite years of low interest rates and asset purchases, the European Central Bank’s monetary policy measures failed to produce a discernible effect on credit in recent months. With interest rates on government bonds drifting ever lower, spreads on investment-grade paper had actually gone up—a trend which could be attributed to continued concern over the impact of negative interest rates on eurozone banks.
With that in mind, the ECB on Thursday unleashed a tidal wave of stimulus measures including cuts in all three policy rates, targeted longer-term financing operations (TLTROs) to bolster banks and boost lending, as well as a surprising expansion of its asset purchase program to include European corporate bonds.
“Lower rates were simply pushing credit spreads wider,” the BofAML analysts said. “We believe that the ECB has … ‘acknowledged’ some of this market dysfunction, and extended a helping hand to credit through future asset purchases.”
Though details of the ECB corporate bond buying program are so far sparse, there are enough facts to begin whittling it down to some broad categories of winners and losers. We know the central bank will be buying non-bank debt issued by investment-grade corporates with relatively stronger balance sheets, for instance.

But we don’t know if they would focus on higher-quality names within the investment-grade universe or whether they’ll be able to buy enough bonds to meet their new €80 billion purchase limit given the tendency of debt investors to buy and hold corporate debt. A previous ECB purchase program, of asset-backed securities, faced similar problems.
Still BofAML sees €554 billion of debt ultimately eligible for ECB buying out of a European investment-grade universe that they put at €1.6 trillion. Of that €554 billion the vast majority has been issued by French and German credits, a fact which may disappoint some who were hoping for targeted stimulus of the eurozone’s weaker nations.
Deutsche Bank AG Credit Analysts led by Nick Burns see similar figures, estimating around €418 billion of eurozone corporate debt could be eligible for ECB purchases, with the bulk of that coming from German and French issuers.
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All of which serves to underscore the difficulty of implementing policy in a monetary union of disparate financial markets and nations. The ECB’s bond buying program has so far sparked a full-blooded rally in European corporate debt markets, but there is a risk that it ends up further dividing the eurozone between weaker and stronger credits.
“This is one of the unfortunate elements of the euro area not having uniform financial markets throughout,” Athanasios Orphanides, a former ECB council member and governor of the Central Bank of Cyprus, said in an interview with Bloomberg Television. “It’s only the largest of the member states and very few of the smaller ones have deep corporate debt markets so they would benefit most from that.”


Source: Bloomberg