EU plans for VAT taxation are doomed to fail. Again.

Taxation is the potential downfall of the EU as an institution. The reason is that within the EU, several member states are making money from the tax evasion in other member states, a situation akin to having a wife slowly murdering her husband with poison. Unless this stops, a divorce becomes inevitable.

Luxemburg, the Netherlands, Ireland, Lichtenstein, Austria, London, and several others are at it: they help large corporations avoid their taxation responsibilities. They either make deals that allow companies to hide their tax obligation, have idiosyncratic definitions under which there are less tax obligations, provide re-labelling services such that head-offices can be a mere post-box, etc.

These tax-avoidance enablers have also systematically frustrated all attempts over the last 30 years to harmonise taxation and reverse the damage they have done to the integrity of the other nation states in the EU. Whenever the issue of tax evasion was in the public eye, for instance during the GFC, they stalled by insisting tax evasion should be solved internationally and should include all other tax havens. Predictably, these were impossible demands. They have also made life difficult inside committees and government forums.

The EU bureaucracy has just put out a new set of proposals regarding VAT on large international corporations (like Google and Amazon), impact evaluated and all. I have read them and predict they will not be implemented, nor would they work anyway.

For one, the EU commission has no power to enforce new tax rules, and these proposals are in a long line of ignored prior proposals. To become law they would need the unanimous backing of all EU members. They hence need the cooperation of about 5 countries that would lose billions if they complied. Fat chance, even with Brexit reducing the political clout of London.

Secondly, the proposals repeat the main mistake of the past: they advocate a rules-based administrative system of taxation which is cumbersome, highly-complex, and easy to game. I explain how over the fold. Continue reading “EU plans for VAT taxation are doomed to fail. Again.”

Why would banks eliminate ATM fees?

Over the past two days, the four major Australian banks have eliminated ATM fees charged to users who are not their customers who use their ATMs. This is great news for people who do not use ATMs of their own banks. They no longer have to pay the fees — that have been transparent since 2009 — that were charged by ATMs — at least those owned by the four major banks. Not surprisingly, the media is fawning over it as are politicians.

But nothing tickles an economist’s spidy sense like this. Wait a second? Banks have decided to charge nothing for a service, that people who are otherwise not their customers for any other products, use? I have to ask: doesn’t this use impose direct costs on the banks? Aren’t those costs likely to be non-trivial? Aren’t those costs likely to rise substantially as consumers do not suffer the pain at the ATM of paying for those costs? The stench no economist nose is picking up is quite pugnant.

The news articles all say that this was the result of government pressure. To be sure, it is just that. There are no laws preventing such things nor has any government wanted to pass them.

And there is a good reason for that. This will have consequences.

For starters, there are going to be fewer ATMs; at least from the big four banks. They no longer have to roll them out to please their own customers, so they won’t. If you all decide a service will be free, it will be supplied by a free service. In addition, independent ATM operators — who charge the highest fees — will also see returns slashed by the new competitive pressure and so they will pull back to. As for smaller banks and credit unions, they get a gift. People will use their ATMs less but since they likely didn’t earn anything other than covering their costs, they might even expand a little. However, in the aggregate, there will be fewer ATMs.

(Actually, the smaller banks really do benefit from all of this. I am not saying that is a bad thing per se but once again, why are the majors giving them this gift?)

I have not been following recent regulatory developments but it strikes me that this may be the first act in trying to get a better deal under the hood. Banks are doing this to get lighter regulation elsewhere. Perhaps to avoid a Royal Commission? This is something that Australians will need to watch out for.

Personally, I have not really bought the notion that Australian banks are colluding on things like interest rates. (I looked). But this time, one bank (the CBA) seemingly unilaterally eliminated fees (for people who weren’t their own customers) and then the other banks followed. The only way the CBA’s customers benefited from this was if the other banks followed. Otherwise, there is no benefit coming back to the CBA. So there is no private benefit, only a group benefits. Usually, those things do not happen without explicit coordination.

Is cross-ownership a competition problem in Australia?

Possibly.

First some context. I raised this issue a couple of years ago in a post here. It was motivated by new research in the US on the impact of cross-ownership by institutional investors on competition in US airlines.

So ask yourself: when those shareholders vote on the composition of boards or the management of the firm, or, importantly how the management of the firm is compensated, are they going to vote for managers who will care only about the profits of the firm they manage or about the profits more broadly? The answer is obvious: they will look to managers who manage in the interest of shareholders and so that means they care about all firm profits and not just the one of their own firm.

In a world where shareholders can get what they want, we won’t have competition in this outcome but, more likely, a collusive outcome. What is more, the firms won’t have to go to all the difficulty of violating antitrust laws to obtain this outcome, they will do it unilaterally. There are no laws against that.

That research was recently updated but has also been extended to banks and also executive compensation consistent with a competition-reducing effect (compensation is based on absolute rather than relative performance).

In an op ed, Shadow Assistant Treasurer and my long-standing co-author, Andrew Leigh, took the US approach and applied it to Australia. He looked at cross-ownership patterns but he made a mistake looking at custodial firms (who don’t have voting or influence rights) rather than the core institutional investors that are the core of the theory. Peter Martin pointed out the error. Who knew that determining ownership could be so complicated?

This of course highlights how difficult it is for politicians to research and make arguments. One little error and it is as if the whole hypothesis doesn’t exist any more. But we academics in the real world don’t operate that way. What I wondered was: do the patterns we see in the US match occur in Australia.

Fortunately, for me, I didn’t have to do much heavy lifting to find out. Here are some summary stats provided on Twitter by Martin Schmalz who is a key player in the US studies. First, let’s check out energy retailing:

martincschmalz_2017-Mar-16 3.jpg

The top three investors are the same across the two biggest competitors in Australia.

Let’s turn to grocery and other retailing:

martincschmalz_2017-Mar-16 2.jpg

Wesfarmers (who owns Coles) and Woolworths have some similarities there.

Or petrol:

martincschmalz_2017-Mar-16.jpg

Or investing itself:

martincschmalz_2017-Mar-16 1.jpg

For banking in general, I took a look and NAB’s top shareholders are (Vanguard 2.03% and BlackRock 1.43% and Capital Research and Management Company, 1.13%); Commonwealth Bank has (Vanguard 2.78%, BlackRock 1.46% and Govt Pension Fund of Norway, 0.88%), while Westpac appears to have little shareholder concentration.

Looking at telecommunications we have Telstra (Capital Research and Management Company, 1.13%; Vanguard 1.62%, BlackRock 0.63%) while Singtel is owned by the Singapore government.

This is, of course, far from a comprehensive concern but the pattern is interesting. The very funds — BlackRock and Vanguard — whose ownership changes were related to competition reductions in the US by research there have the same pattern of ‘diversified’ holdings in Australian oligopoly companies.

Now you might say that even so, the ownership of the largest shareholders is low. That is true. It is not like they themselves command a majority for voting purposes. However, as the largest shareholders they have power and their trading behaviour can impact on the returns of others. The very fact that we see cross-ownership patterns in Australia similar to the US where there are concerns that have been measured suggests that this is something we need to watch.

Will pricier soda lead to slimmer waistlines?

Policies that can be set in motion with little more than the stroke of a pen can be very seductive. That’s particularly true with policies that appear to have the same hue as some major social problem, since lawmakers can use that problem as a rationale for the policy, and hope that no one thinks too hard about whether it’s logical to expect the policy to effectively address the problem.

Such is arguably what we’ve seen recently in the heated debate about universal basic income (UBI), and now it we are seeing it with the proposed sugar tax.

Though it may have some other benefits (e.g., capturing externalities of obesity), the sugar tax is often defended on the basis that there are a lot of obese people in modern-day Australia – including children – and many Australians take in far more sugar than health guidelines recommend, much of it in the form of sugary drinks. Hence, or so the argument goes, if we make those drinks more expensive through imposing a sugar tax, then people will buy less of them and obesity rates will dutifully start to fall.

As parents, we can make sugary drinks harder for our kids to access by not buying a lot of them in the first place. Schools too have choices about what to stock in canteens, and how to arrange and price food so that healthier things are within easier reach. A tax on sugary drinks also makes them less accessible, especially for cash-constrained people, and therefore may well reduce the consumption of those drinks – as has been seen in Mexico.

But are sugary drinks really the underlying cause of obesity? History shows us that sugary drinks have been around far longer than the modern obesity epidemic, which began in select developed countries around the late 1980s and early 1990s. Why were we able to resist the soda on the shelves for generations before the 1980s, after which we suddenly started succumbing to large quantities in the past generation? On the basis of layperson logic alone, sugary drinks cannot be the primary cause of the catastrophic rise in obesity we’ve seen in the internet age.

Evidence suggests that sugary drinks are more likely to be bought regularly by people in the lower income brackets of our society. Why then do lower-income adults buy large quantities of sugary drinks for themselves or their children? Are they ignorant of sugar’s health effects? Sadomasochistic? Trying to select the least-cost beverage option (water) but misfiring due to plain stupidity?

An alternative theory is that the reason for the initial kick-off in obesity rates, and some of the reason they’ve stayed high, is psychological. Evidence suggests that being lower-income can cause negative pressure on people’s self-esteem. The stress of being poor may have worsened as inequality has increased, and/or with the advent of globalized media, which provides access to unlimited stories about beautiful superstars to whom it’s very difficult for most real people to measure up. If modern lower-income Australians are already finding life pretty mentally exhausting, then they may not have the surplus mental strength required to resist buying unhealthy things (sugary drinks included) that will taste nice, and that their family and friends will enjoy and thank them for.

To the extent that obese people make poor food purchase decisions for psychological reasons, a tax on sugary drinks will do little to help them lose weight.

In Memoriam Thomas C. Schelling

Tom Schelling was a US American economist (born April 14, 1921); until his death yesterday (Aussie time) he was Distinguished Professor of Economics at the University of Maryland, College Park. He was awarded the 2005 Nobel Memorial Prize in Economic Sciences which he shared with Robert Aumann, a belated completion of the NASH quartet that was not possible in 1994 because the Nobel Prize is given to maximally three people.

Schelling was awarded the Nobel Prize mainly “for having enhanced our understanding of conflict and cooperation through game-theoretic analysis”.  This is true to the extent that he typically thought about interdependent decisions, i.e., decisions whose outcomes depend on the decisions of others. Schelling wanted game theorists to pay more attention to strategic uncertainty, issues such as promises and threats, strategies of credible commitments, tacit bargaining, the role of communication, and the design of enforceable contracts and rules. Schelling is probably right in saying (as he did in the biographical sketch that he supplied to the Nobel Prize Committee) that his work in this area – at least initially – did not have noticeable influence on game theorists but that it reach sociologists, political scientists, and some economists. His interests in such issues were in the first couple of decades clearly motivated by his having one foot in academia and the other firmly in various policy making bodies.  He ended his work for the government upon the U.S. invasion of Cambodia in the Spring of 1970 but in later years took up important advisory and consulting activities.

Schelling wrote numerous widely cited articles which were the basis for the half dozen books that he wrote. These are Schelling (1960, 1961, 1966), Schelling  (1978), and Schelling (1984, 2006). The first three – as also suggested by their title – deal with strategic interaction between entities such a nations but Schelling (1960) is a very fundamental, and eminently readable, treatise that tries to inject new themes into game theory. Almost three decades later it inspired a literature on what is now known as coordination games (Devetag & Ortmann 2007). Schelling (1978) provides models of racial dynamics that are as insightful as they are simple – Schelling’s work is almost always non-technical — and elegant. He showed specifically how seemingly fairly innocent micro-motives could bring about undesirable macro-outcomes. This particular work is said to have inspired what is now known as agent-based computational economics.  Schelling (1984) is dedicated to issues of self-command and Schelling’s interest in substance abuse and addictive behavior; this interest guided much of his research in the seventies and eighties.  The strategic interaction between competing selves is at the heart of his personalized narratives of strategic conflict.  Schelling (2006) covers all aspects of his work and in this sense is the idea starting point for an exploration of the astonishing range of ideas pursued by this very public intellectual.  The book contains also three essays on climate change, and related collective action problems, that interested him since 1980.  Schelling is on record as saying that “global warming and climate change is what I expect to be, during this century, what nuclear arms control was during the century past, namely an immense challenge to ‘cooperation amid’ conflict.” His solution to climate change – geoengineering rather than a world-wide cap and trade system – is controversial.

The above entry has been culled, with slight modifications, from Morris Altman’s Encyclopedia of Behavioral Decision Making (Praeger 2015)

See also: Strategic Uncertainty, Coordination games, Theory of conflict, Self-command

Further Reading:

Devetag, Giovanna and Andreas Ortmann. 2007. “When and Why? A Critical Review of Coordination Failure in the Laboratory.” Experimental Economics 10, 2007, 331 – 44.

Ortmann, Andreas and Angelika Weber. 2007. “Thomas Schelling und die Theorie der Self-Command,” Pp.121 – 34 in Ingo Pies and Martin Leschke (eds), Thomas Schellings strategische Ökonomik. Tübingen: Mohr-Siebeck, 2007.

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2005:

Biographical http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2005/schelling-bio.html

Press release http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2005/press.html

Avanced information http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2005/advanced-economicsciences2005.pdf

Schelling, Thomas. 1960. The Strategy of Conflict. Cambridge, MA:  Harvard University Press.

Schelling, Thomas and M.H. Halperin. 1961. Strategy and Arms Control. New York: Twentieth

Century Fund.

Schelling, Thomas. 1966. Arms and Influence. New Haven, CT: Yale University Press.

Schelling, Thomas. 1978. Micromotives and Macrobehavior. Cambridge, MA:  Harvard

University Press.

Schelling, Thomas. 1984. Choice and Consequence. Cambridge, MA:  Harvard University Press.

Schelling, Thomas. 2006. Strategies of Commitment and Other Essays. Cambridge, MA:

Harvard University Press.

Zeckhauser, Richard (1989): “Reflections on Thomas Schelling”, in: Journal of Economic

Perspectives 3, S. 153–64.

 

Tot ziens Australie!

It’s been a great 15 years in Australia for me and the family, so we will be leaving lots of friends and colleagues behind as we seek new adventures in London, where from next week onwards  I will be part of a Wellbeing centre, pretty much the same topic as the Australian Research Council has been generously funding me to look at for the last 3 years.

The essential aim of the ‘Centre of Wellbeing’ at LSE will be to put utilitarianism into practice as much as possible. To this end, we hope to be part of wellbeing policy experiments, textbooks on how a decision maker can be a better wellbeing-bringer, longitudinal studies, large data-gathering exercises, policy briefs, Master’s courses, inter-active wellbeing systems, and all the rest of it. We have partners all over the world and an international panel for wellbeing is up and running at the end of next week. If you happen to have a few million lying around to help us get to our goals quicker, then please help!

Whilst the grass is greenest in Australia, variety is the spice of life so I am looking forward tremendously to the new adventure. Still, the family is not truly leaving Australia, as my 3 kids now carry Australian citizenship and one kid is still studying in Sydney. So it is ‘Tot ziens’ (‘See ya later!’) rather than farewell!

To all my friends and colleagues in the Australian economics community: do come and look me up in London; please join in with utilitarian-oriented research projects; and best of luck.

In Memoriam Reinhard Selten (1930 – 2016)

German economist extraordinaire Reinhard Selten has died. Born October 1930, he was 85.

In 1994 he was awarded the Nobel Memorial Prize in Economic Sciences which he shared with John Harsanyi and John Nash, three quarters of the NASH quartet of Nash, Aumann, Selten, Harsanyi that has been widely credited to have advanced decisively the theory of games in the fifties, sixties, seventies, and eighties. Aumann received his Nobel Prize, together with Thomas Schelling, in 2005.

Selten was awarded the Nobel Prize mainly on the strength of his game-theoretic contributions. Specifically, he was credited by the Nobel Prize Committee with the introduction of the concept of subgame perfection which defined conditions under which to exclude from a set of equilibria those which are unreasonable by some standard (non-credible threats). A decade later he provided as a further tool in the game theorist’s toolbox the concept of a trembling hand equilibrium which likewise helped to reduce the set of equilibria.

The Nobel Memorial Prize Committee in Economic Sciences credited Selten in addition explicitly with “powerful new insights regarding evolutionary games and experimental game theory”. Indeed, after he had finished his master’s thesis in 1957, Selten was hired by professor Heinz Sauermann who held a chair at the University of Frankfurt and for whom he worked in various roles as assistant for about a decade. Selten was given considerable leeway by Sauermann and, influenced by characteristic function experiments done by Kalisch et al. (1954) as well as Simon’s Models of Man (1957), embarked on the study of oligopoly experiments which ended a couple of years later in his first experimental paper (Sauermann & Selten 1959). It was through Simon’s influence as well as his own experimental work that Selten started thinking about the bounded rationality that defines much of the decision making of individuals and firms. In fact, from the very beginning of his academic career it has been this methodological dualism that has defined his work (and occasionally confounded his colleagues).

Selten – while being famously dismissive of some of the rites of the scientific community – has worked on too many topics to even start an enumeration here: “I do not want to convey the false impression that my research is single-mindedly organized around a grand question. I am easily attracted by the opportunity to shift my interests into unforeseen exciting new directions. The little coherence there is in my work is due to a desire to understand both fully and boundedly rational economic behaviour, especially in the context of game situations.” (Selten 1993, p. 113)

Selten (1993) remains a good primer of his research interests over the first three or so decades; it is also an enjoyable read. Ortmann (1999) is a succinct introduction to a set of articles selected in collaboration with Selten. Selten (1999) has a brief but very informative biographical sketch by himself. Easily accessible information about both his life and his work may be found on the website of the Nobel Prize Committee .

Acknowledgment: The above draws on a contribution I wrote for Real World Decision Making: An Encyclopedia of Behavioral Economics. (editor: Morris Altman, Praeger 2015)

References.

Kalisch, G., Milnor, J.W., Nash, J., and Nering, J.D..1954. “Some experimental n-person games.” Pp. 301-27 R.M. Thrall, C.H. Coombs, and R.L. Davis (eds). Decision processes.  New York and London.

Ortmann, Andreas. 1999. “Introduction (to Selten 1999).” Pp. xi – xxi in Selten (1999)

Sauermann, Heinz, and Selten, Reinhard. 1959. “Ein Oligopolexperiment.” Zeitschrift fuer die gesamte Staatswissenschaft 115, 437-71.

Selten, Reinhard. 1993. “In Search of a Better Understanding of  Economic Behaviour.” Pp. 115-39 Arnold Heertje (ed). The Makers of Modern Economics, Vol. 1. Harvester Wheatsheaf.

Selten, Reinhard. 1999. Game Theory and Economic Behaviour. Selected Essays Volumes One, Two. Cheltenham, UK and Northhampton, MA, USA: Edward Elgar.

Simon, Herbert A. 1978. “Rationality as a Process and as a Product of Thought.” American Economic Review 70: 1–16.