Public Finance Review’s Special Issue: Analyzing the Redistributive Impact of Taxes and Transfers in Latin America

export-5-475101-mWhile Latin America is taking in more tax revenue cumulatively than it did twenty years ago, the International Business Times reported in 2012 that the income gap between the wealthy and the poor is still drastically wide, with the richest 20 percent making 20 times more than the poorest 20 percent. So what’s changed in the recent past? What can be done in the future? Public Finance Review recently published a special issue titled Analyzing the Redistributive Impact of Taxes and Transfers in Latin America that looks at various aspects of these ideas and is available to read for free for the next 30 days!

Nora Lustig, Carola Pessino, and John Scott collaborated on the introductory article “The Impact of Taxes and Social Spending on Inequality and Poverty in Argentina, Bolivia, Brazil, Mexico, Peru, and Uruguay: Introduction to the Special Issue.”

The abstract:

How much redistribution and poverty reduction is being accomplished in Latin America through social spending, subsidies, and taxes? Standard fiscal incidence analyses applied toPFR_72ppiRGB_powerpoint Argentina, Bolivia, Brazil, Mexico, Peru, and Uruguay using a comparable methodology yields the following results. Direct taxes and cash transfers reduce inequality and poverty by nontrivial amounts in Argentina, Brazil, and Uruguay but less so in Bolivia, Mexico, and Peru. While direct taxes are progressive, the redistributive impact is small because direct taxes as a share of GDP are generally low. Cash transfers are quite progressive in absolute terms, except in Bolivia where programs are not targeted to the poor. In Bolivia and Brazil, indirect taxes more than offset the poverty-reducing impact of cash transfers. When one includes the in-kind transfers in education and health, valued at government costs, they reduce inequality in all countries by considerably more than cash transfers, reflecting their relative size.

Click here to read “The Impact of Taxes and Social Spending on Inequality and Poverty in Argentina, Bolivia, Brazil, Mexico, Peru, and Uruguay: Introduction to the Special Issue” and here for the table of contents to of Public Finance Review’s Special Issue: Analyzing the Redistributive Impact of Taxes and Transfers in Latin America. Make sure to sign up for e-alerts from Public Finance Review by clicking here!

The Cost of Overcoming Profit Loss

While there have been many capitalistic strides to overcome the profit losses between the 1950s and the 1970s, there’s been a downward effect in households. Dr. Fred Moseley at Mount Holyoke College examines and explains this phenomenon in his article,”The U.S. Economic Crisis: From a Profitability Crisis to an Overindebtedness Crisis,” published in Review of Radical Political Economics.

The abstract:

This paper argues that the fundamental cause of the current economic crisis in the U.S. economy was a significant long-term decline in the rate of profit from the 1950s to the 1970s. Capitalists responded to this profitability crisis by attempting to restore their rate of profit by a variety of strategies, including: wages and benefit cuts, inflation, “speed-up” on the job, and globalization. These strategies have largely restored the rate of rrpeprofit, but have resulted in stagnant real wages for workers for decades. As a result, household indebtedness has increased to unprecedented levels and must be substantially reduced in order to make possible a sustainable recovery.

Read the full article here, and don’t forget to sign up for e-alerts to stay up-to-date on the latest from RRPE!

Regulatory Roulette: Ladies and Gentlemen, Please Place Your Bets…

Editor’s note: We are pleased to welcome Kim Soin of the University of Exeter in the U.K. and Christian Huber of Helmut-Schmidt-University in Germany, whose article “The Sedimentation of an Institution: Changing Governance in U.K. Financial Services” is forthcoming in the Journal of Management Inquiry and now available in the journal’s OnlineFirst section.

Regulation matters, and failures of regulation, have serious consequences. Post financial crisis – and faced with the tricky situation that the UK banks are now seen as ‘too big to fail’ – there is a new urgency in re-thinking how banks should be regulated. There is no doubt that re-building public trust and reputation in the financial system presents a serious challenge to policy makers. Is the solution to regulatory failure more of the same, as the current response seems to suggest and despite the abolition of the Financial Services Authority? Or, should we be thinking about other forms of regulation?

UntitledHow did we get to the situation where certain styles of regulation seem to be part of the problem – and yet more of the same regulation is being posed as the solution? Or, to put it another way: how did different forms of regulation – usually perceived as failing – become ‘taken-for-granted’ solutions to the various problems of the UK banks? Our research suggests that ‘new’ forms of regulation rely much more on their (failed) predecessors than regulators might like to think.

‘Big Bang’, or the deregulation of the UK financial services sector in 1986, was the first comprehensive attempt to create a unified system of regulation within the UK financial sector. Promoted by a neo-liberalist ideology led by ‘Thatcherism’ in the UK, and ‘Reagonomics’ in the US, the regulatory ethos was one of non-intervention and a conviction that free market forces, healthy competition and self-regulation would provide effective regulation. Big Bang generated a framework of regulation that was, and is to this day, in a continuous state of development and modification. Since then, we have witnessed a cycle of failing regulation, deregulation and re-regulation – encompassing self-regulation, State regulation, market-based regulation and risk-based regulation – none of which have provided the solution of how best to regulate the banks. We have seen scandal after scandal, ranging from the pensions scandal in the late 1980s through to PPI mis-selling, the global financial crisis, and the LIBOR rate fixing scandal – amongst many others. Is anyone else dizzy yet?

JMI_72ppiRGB_150pixwBy tracing the development of UK financial regulation between 1986 and 2011 in the field of retail financial services in the UK, we identify four phases of regulation. Each phase is characterised by the (co)existence of four competing approaches to regulation: the profession-based, the State-based, the market-based as well as the market – and risk-based approach – but in each phase one prevails. We show how advocates of the different regulatory approaches (the profession, the State and the market) engaged in fierce competition fuelled by various scandals and explain how these failing approaches have led to taken-for-granted, State-led financial regulation in its current form.

Our findings identify four catalysts that contribute to the taken-for-granted nature of financial regulation: The evocation of neo-liberal ideologies, the appropriation of scandals, the growing number of stakeholders and the increasing organization of stakeholders. We argue that these four catalysts contributed to a form of institutionalization that can best be described by the metaphor of sedimentation – the layering of one regulatory approach upon the other, which ultimately led to the taken-for-granted nature of financial regulation.

What can policy makers and regulators take from this? First, it appears that there are no alternatives to financial services regulation: the concept of financial regulation is seen as an inevitable way to organize the financial services sector. The big question however, is still the same: what type of regulation should be implemented? Second, the days of ‘gentlemanly capitalism’ are dead: recent, and past events have shown that the profession is no longer trusted to self-regulate and the State has become a central actor in this process. Third, even when regulatory approaches (be it the profession, State or market) seemingly become obsolete, they leave behind a sediment that must be taken into consideration: regulators promoting new financial regulations need to be wary of the taken-for-granted legacy of prior approaches. Finally, a web of organizations is seen as necessary for effective financial regulation.

Untitled2A number of questions remain: Is it enough to focus on preventing the failures of the past repeating themselves, or do we need to think about how to avoid the failures that might emerge in the future? During the last twenty-five years we have witnessed the failure of each form of regulation (the profession, the State and the market). The proposed solution is yet more regulation of the ‘interventionist’ kind, the abolition of the FSA, the creation of two new regulators and a crack down on commission based reward structures. Sound familiar?

But why don’t we look to other sectors for solutions: professionalizing the industry  – similar to doctors and lawyers? Or introducing soft regulations – like the new BSI governance standard, guidelines and codes of good practice? What about the role of compliance cultures – the values and beliefs about the purpose and significance of regulation? Can good compliance be good business? How can the regulator promote this? Similarly, a new vision for managing compliance risk is required.

Regulation matters. It matters in the sense of being vital to building an effective and accountable financial environment. Serious thought needs to be given to the role of banks in society – so that banks (and regulators) can re-build public confidence, trust and reputation. As we enter a new era of financial regulation, surely it is time for some lateral and creative thinking? After all, the banks have been doing it for years.

Read “The Sedimentation of an Institution: Changing Governance in U.K. Financial Services” in the Journal of Management Inquiry.

Book Review: Sociology of the Financial Crisis

In the latest issue of Administrative Science Quarterly, Peer C. Fiss of the University of Southern California published a book review of “Markets on Trial: The Economic Sociology of the U.S. Financial Crisis,” edited by Michael Lounsbury and Paul M. Hirsch:

As the most recent in a long line of market crashes, the devastating financial crisis of 2008 has been the focus of a number of sensemaking attempts, including several highly visible works by journalists such as Lewis (2010) and Sorkin (2009). Most of these works seek to construct a coherent perspective of the financial meltdown, aiming to provide the reader with an authoritative narrative. Markets on Trial: The Economic Sociology of the U.S. Financial Crisis takes a different approach. Starting with a commitment to economic sociology, this book brings together a diverse set of perspectives that are applied to a number of different aspects of the crisis along with the larger, seismic shifts that preceded it.

Click here to read on and here to read more book reviews from Administrative Science Quarterly.

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How Did 9/11, Financial Crisis Affect Hotel Performance?

Renáta Kosová (left) and Cathy A. Enz

Editor’s note: We are pleased to welcome Dr. Renáta Kosová and Dr. Cathy A. Enz, both of Cornell University, who published “The Terrorist Attacks of 9/11 and the Financial Crisis of 2008: The Impact of External Shocks on U.S. Hotel Performance” on September 20, 2012 in Cornell Hospitality Quarterly.

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The U.S. hotel industry faced two major external shocks in the decade of the ’00s—the terrorist attacks of September 11, 2001, and the financial crisis of late 2008 thought to have culminated on September 15th, the day after Lehman Brothers declared bankruptcy. While speculation and opinion has flourished on the impact of such shocks to the lodging industry, little attempt has been made to devise empirical models to isolate and explore the effects of these events on hotel performance. The conventional belief is that such shocks have a damaging and long-term impact on industry revenues. However, it is also possible that the impact of such shocks is overstated and hotels adjust relatively quickly, though such adjustment may vary across locations and segments. The impact of the collapse of the financial markets and the devastating events of September 11th on the lodging industry is the purpose of our study forthcoming in Cornell Hospitality Quarterly.

Using data from Smith Travel Research covering nearly 35,000 hotels, this study deploys a longitudinal modeling approach to assess the impact of the two shocks on hotel-performance metrics – average prices, RevPAR and occupancy. Our empirical approach not only controls for various hotel and market characteristics, such as hotel size and age, monthly seasonality, unemployment, population, and other market-specifics, but also unobserved hotel heterogeneity across hotels. Empirical models that include such controls are necessary to assure that the study captures the isolated impact of the external shocks and the duration of their impact.

The results from this study show that hotels were significantly affected by both events, but they started to recover relatively quickly, within four months of each shock. Because of the nature of the shock, the 9/11 terrorist attacks had an abrupt and dramatic impact in reducing hotels’ occupancy; average prices briefly followed occupancy downward. The effects of the financial crisis took longer to develop, but were less striking, and apparently well-handled by most hotel managers. Analyses across different segments revealed that hotels in the more complex luxury segment are the most susceptible to environmental shocks, but that the economy segment is the slowest in recovering from terrorism. Moreover, a sub-analysis focused on New York City’s hotels, which stand next to ground zero for both shocks, showed a pattern of occupancy, rates and RevPAR similar to the rest of the U.S. Overall, our study paints a picture of an industry that regained performance quickly and demonstrated its ability to successfully adapt and quickly recover from these extraordinary environmental shocks.

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Click here to read the article in Cornell Hospitality Quarterly, and follow this link to receive email notifications about the latest research on hospitality management from CQ.

Falling Profits as Cause of Recession

As earnings season opens this week, corporate profits are expected to be lower than originally anticipated, according to The Wall Street Journal and other news sources. Today, we look to the Review of Radical Political Economics (RRPE) for related analysis. José A. Tapia Granados of The University of Michigan published “Statistical Evidence of Falling Profits as Cause of Recession: A Short Note” on February 3, 2012 in RRPE. To see other OnlineFirst articles, click here. From the introduction:

Profits—the basic variable in business activity—were one of the major concepts analyzed by the founders of political economy, from William Petty to Adam Smith, David Ricardo, and John Stuart Mill. However, profits are quite rarely mentioned in modern discussions in mainstream economics about macroeconomic issues in general or recessions in particular. Even in the heterodox field of progressive or radical economics the 2007-2009 crisis has been seen as related to a number of factors, but not falling profitability.

Corporate profits in the U.S. economy, however, had a peak in the third quarter of 2006, well before the upsurge of the serious disturbances in financial markets and the severe downturn of the real economy that were baptized as the Great Recession. As in other recent recessions, profits started decreasing several quarters before the downturn began to be noticeable. This note presents statistical evidence on the fall of profits preceding recessions and discusses the economic meaning of that evidence.

Read the full article here. To learn more about the Review of Radical Political Economics, please follow this link. To receive email alerts about newly published articles and issues, click here.

Risky Business: Does ERM Increase Firm Value?

As JPMorgan CEO Jamie Dimon came under fire for the bank’s $2 billion trading loss, the critical issue of risk management again came to the forefront of business dialogue.

Against the backdrop of the global financial crisis, a study in the Journal of Accounting, Auditing & Finance (JAAF) looks at enterprise risk management (ERM), a rising but little-researched paradigm in global financial institutions–as well as in the government–to evaluate its effectiveness.

Michael K. McShane, Anil Nair, and Elzotbek Rustambekov, all of Old Dominion University, published “Does Enterprise Risk Management Increase Firm Value?” in the October 2011 issue of JAAF. Click here to view more articles in this issue.

The authors explain in the abstract:

Enterprise risk management (ERM) has emerged as a construct that ostensibly overcomes limitations of silo-based traditional risk management (TRM), yet little is known about its effectiveness. The scant research on the relationship between ERM and firm performance has offered mixed findings and has been limited by the lack of a suitable proxy for the degree of ERM implementation. Using Standard and Poor’s newly available risk management rating, the authors find evidence of a positive relationship between increasing levels of TRM capability and firm value but no additional increase in value for firms achieving a higher ERM rating. Considering these results, the authors suggest directions for future research.

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