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More on the US bank tax

Further to my last post, Greg Mankiw — who is not a man to lightly advocate an increase in taxes on anything, but who understands very well the problems of negative externalities and implicit guarantees — has written a good post on the matter:

One thing we have learned over the past couple years is that Washington is not going to let large financial institutions fail. The bailouts of the past will surely lead people to expect bailouts in the future. Bailouts are a specific type of subsidy–a contingent subsidy, but a subsidy nonetheless.

In the presence of a government subsidy, firms tend to over-expand beyond the point of economic efficiency. In particular, the expectation of a bailout when things go wrong will lead large financial institutions to grow too much and take on too much risk.
[…]
What to do? We could promise never to bail out financial institutions again. Yet nobody would ever believe us. And when the next financial crisis hits, our past promises would not deter us from doing what seemed expedient at the time.

Alternatively, we can offset the effects of the subsidy with a tax. If well written, the new tax law would counteract the effects of the implicit subsidies from expected future bailouts.

My desire for a convex (i.e. increasing marginal rate of) tax derives from the fact that the larger financial institutions are on the receiving end of larger implicit guarantees, even after taking their size into account.

Update:  Megan McArdle writes, entirely sensibly (emphasis mine):

That implicit guarantee is very valuable, and the taxpayer should get something in return. But more important is making sure that the federal government is prepared for the possibility that we may have to make good on those guarantees. If we’re going to levy a special tax on TBTF banks, let it be a stiff one, and let it fund a really sizeable insurance pool that can be tapped in emergencies. Like the FDIC, the existance of such a pool would make runs less likely in the shadow banking system, but it would also protect taxpayers. Otherwise, with our mounting entitlement liabilities, we run the risk of offering guarantees we can’t really make good on.

I agree with the idea, but — unlike Megan — I would allow some of it to be collected directly as a tax now on the basis that the initial drawing-down of the pool came before any of the levies were collected (frustration at the political diversion of TARP funds to pay for the Detroit bailout aside).

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The US bank tax

Via Felix Salmon, I see the basic idea for the US bank tax has emerged:

The official declined to name the firms that would be subject to the tax aside from A.I.G. But the 50-odd firms, which include 10 to 15 American subsidiaries of foreign institutions, would include Goldman Sachs, JPMorgan Chase, General Electric’s GE Capital unit, HSBC, Deutsche Bank, Morgan Stanley, Citigroup and Bank of America.

The tax, which would be collected by the Internal Revenue Service, would amount to about $1.5 million for every $1 billion in bank assets subject to the fee.

According to the official, the taxable assets would exclude what is known as a bank’s tier one capital — its core finances, which include common and preferred stock, disclosed reserves and retained earnings. The tax also would not apply to a bank’s insured deposits from savers, for which banks already pay a fee to the Federal Deposit Insurance Corporation.

i.e. 0.15%.  It’s certainly simple and that counts for a lot.  It’s difficult to argue against something like this.

I would still have liked to see it as a convex function so that, for example, it might be 0.1% for the first 50 billion of qualifying assets, 0.2% for the next 50 billion and 0.3% thereafter.

Better yet, pick a size that represents too big to fail (yes, it would be somewhat arbitrary), then set it at 0% below, and increasing convexly above, that limit.

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Avatar

The visual detail is incredible.  It is a must-see in 3D.  It was designed for 3D.

The broad plot ideas are nothing special, particularly if you’ve read much sci fi or fantasy, but that’s okay.  The moral theme (humans in general and corporations in particular are evil, tree hugging Gaia worship is cool) is rammed down your throat too much — I would have liked to see something a little more Alien-and-The-Abyss-meet-your-classic-dragon-fantasy-novel and a little less Princess-Mononoke-and-Pocahontas-read-the-Green-Left-Weekly — but, as my brother points out, it’s not a film written for me, but for it’s target audience, who apparantly like broad brush strokes and simplistic themes.

Even so, I would have liked some proper character development and better acting.  The bad guy is cartoonish.  The corporate stooge is simpering and never displays any of the internal conflict the role clearly calls for.  This standard of visual detail will soon enough be the new normal and once that happens, nobody will remember Avatar, which is a shame.

Mike Russell has written a review that I generally agree with, here (lots of spoilers).

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What were Hoon and Hewitt thinking?

I don’t understand the (failed) attempt by Patricia Hewitt and Geoff Hoon to inspire a leadership challenge in the Labour Party here in the UK.  Any serious contender for the job (i.e. Milliband) would surely recognise that the chance of a Labour victory in this year’s general election is miniscule, no matter who leads the party, and to lose an election three or four months into your leadership would hardly make for a sterling start.

If one takes a Tory victory as given, it would be far better to let Brown take the full hit for the loss.  Keep him on as a figurehead to take all the bile, spit, rage and blame for the state of the country as a whole and the state of the government’s finances and the electoral loss in particular.  Let the voting public gorge themselves in a cathartic spasm of kicking the Blair/Brown pairing and then shuffle Brown off, declare that there will be no return to Old Labour and start observing loudly at every opportunity that now it’s the Tories that are all about spin.

Brown’s job at this point is not so much to put out the fire — that can no longer be done — but to save the furniture.  So why did Hewitt and Hoon do this?  It was never going to work and it only serves to further lessen the probability of Labour retaining some of their seats.

The obvious answer is that they don’t consider a Tory victory to be a foregone conclusion and somehow think that simply getting rid of Brown will help the broader party separate itself from the Blair/Brown brand.  The first part of that sentence may indeed be true (afterall, the Tories need an average swing of 7% to win), but the second is utterly false.  Labour will not escape the Blair/Brown brand until they’ve spent some time in opposition for the simple reason that the public needs to kill it before they will forget about it.