From November 29 to December 10 Cancun, Quintana Roo is the site for the United Nations Framework Convention on Climate Change. Unfortunately, there is no reason to expect any sort of significant agreement outlining specific steps to be taken to slow or reverse human-caused climate change. The incentives to do so don't exist. Global pollution is a problem that national governments are not well-suited to address.
Consider a very simple example. There is a factory that emits soot that negatively affects a community. What options do the citizens of the community have? Although the Coase Theorem shows that there are conditions (rather strict ones) under which the private parties can reach an agreement to resolve the problem, generally the only practical option is to seek redress from the local government. The government could adopt a law limiting the pollution or impose a tax on the pollution. A correctly specified tax would reduce the pollution to the socially efficient level. Now suppose that the community is on the frontier and the factory is across the border in another country. Why should the government of the jurisdiction in which the factory is located seek to reduce pollution if it has little effect on its own citizens? Almost certainly it will do nothing because restricting the pollution would harm its own citizens by reducing production, hence employment, in the factory.
On a much bigger scale, climate change presents the same sort of problem. Presently, the only (obviously) affected nations are a few small island countries in danger of disappearing due to rising sea levels. The apparent negative consequences for the biggest emitters of global warming gases; the United States, China, and Russia; are small thus these countries (and others) have little incentive to reduce the emission of such gases. Until the (expected) costs of climate change rise sufficiently to affect these countries as well, nothing will happen.
According to the NY Times (As Glaciers Melt, Science Seeks Data on Rising Seas, November 22, 2010) many scientists expect sea levels to rise three feet by 2100. If so, nobody will have any meetings in Cancun at the next turn of the century because the hotel zone-convention area will be underwater.
Monday, November 22, 2010
Friday, November 12, 2010
Taxes-In Praise of Mexico
Let me note at the outset that taxes are distressingly high in Mexico. There is a value-added tax (VAT) of 16% on most goods; food is excluded for example. The VAT rate is a bit less at the international borders. Mexico also imposes a hefty income tax on those from whom it can easily extract the tax; people who work in the formal sector such as government bureaucrats, employees in large corporations, and university professors, of course, among others. Tax avoidance is one reason the informal economy is so large in Mexico. Indirectly, the federal government taxes all Mexicans by taking a portion of the revenue from oil sales rather than redistributing those funds to the nominal owners of the oil, the citizens of Mexico. Naturally there are a multitude of other taxes, somewhat less important as sources for federal government revenue.
Instead, the subject of this blog is tax reporting. Around this time of year I start thinking about my income taxes in the U.S. I earn a tiny bit of interest and dividends in the U.S. but the bulk of my income is from my salary in Mexico. The US does not tax my salary, it is below the limit allowed for foreign earnings, but I do have to report the earnings to the IRS and the state of Montana where I am a legal resident. This reporting requirement always generates the same sort of angst I had prior to April 15 when I lived in the US. I would (almost) rather be waterboarded. Preparing my US tax forms still requires a ridiculous amount of time gathering documents and filling out forms.
In addition, I have to file a tax report in Mexico. But, the process far less complicated. In Mexico I complete an online form that is submitted electronically to the Secretaria de Hacienda (the government ministry responsible for collecting taxes). Including my name, the form requires entering information in, perhaps, eight or ten spaces. Very few deductions are allowed thus greatly simplifying the process. After submission, I receive an e-mail confirming the receipt of my tax return. Refunds are deposited electronically in my bank account. If I owe taxes a trip to a local bank is required where I pay and the funds are deposited in the appropriate government account. In all, perhaps 2 hours work if I don't owe anything and an additional hour if I have to go to the bank.
Thank you Mexico for not making tax reporting the nightmare that it is in my own country.
I wish that members of the U.S. Congress and the Administration would quit quibbling about the extension of the 'Bush tax cuts' and start talking seriously about total reform of the system. The flat tax proposal developed by Robert Hall and Alvin Rabushka would be a good place to start. If the Tea Party proposed such a reform, I suspect it would gain millions of converts, me included.
Instead, the subject of this blog is tax reporting. Around this time of year I start thinking about my income taxes in the U.S. I earn a tiny bit of interest and dividends in the U.S. but the bulk of my income is from my salary in Mexico. The US does not tax my salary, it is below the limit allowed for foreign earnings, but I do have to report the earnings to the IRS and the state of Montana where I am a legal resident. This reporting requirement always generates the same sort of angst I had prior to April 15 when I lived in the US. I would (almost) rather be waterboarded. Preparing my US tax forms still requires a ridiculous amount of time gathering documents and filling out forms.
In addition, I have to file a tax report in Mexico. But, the process far less complicated. In Mexico I complete an online form that is submitted electronically to the Secretaria de Hacienda (the government ministry responsible for collecting taxes). Including my name, the form requires entering information in, perhaps, eight or ten spaces. Very few deductions are allowed thus greatly simplifying the process. After submission, I receive an e-mail confirming the receipt of my tax return. Refunds are deposited electronically in my bank account. If I owe taxes a trip to a local bank is required where I pay and the funds are deposited in the appropriate government account. In all, perhaps 2 hours work if I don't owe anything and an additional hour if I have to go to the bank.
Thank you Mexico for not making tax reporting the nightmare that it is in my own country.
I wish that members of the U.S. Congress and the Administration would quit quibbling about the extension of the 'Bush tax cuts' and start talking seriously about total reform of the system. The flat tax proposal developed by Robert Hall and Alvin Rabushka would be a good place to start. If the Tea Party proposed such a reform, I suspect it would gain millions of converts, me included.
Wednesday, November 3, 2010
More on Property Rights
In contrast to Mexico, the United States is generally regarded as having strong property rights. The current home foreclosure mess in the US introduces a huge element of doubt into property rights. How and when it will be resolved is uncertain at the moment. There is a reasonable chance that the U.S. economy will suffer another recession in 2011 as a result of problems in the financial sector.
Briefly, many who purchased homes in the real estate boom are behind in their payments. Lenders have foreclosed on many of these properties. During the second quarter of 2010, nonperforming loans, those more than 90 days past due, were 5.36% of total loans according to data from the Federal Reserve Bank of St. Louis (the graph is available at http://research.stlouisfed.org/fred2/graph/?s[1][id]=NPTLTL ) Mortgages currently account for a large share, but not all, of past due loans. Rates over 5% are extraordinarily high. Prior to 2009, the highest rate, 4.01%, occurred in 1991. Between 1995 and 2007 the rate averaged slightly more than 1%.
Until recently, the process of foreclosure has been relatively straightforward. A borrower does not pay, the lender sends (often nasty) notices, legal steps are taken and the lender takes over the property. Banks and other lenders typically do not want to own houses, so they usually try to sell the foreclosed properties. But, in part due to the shear volume of foreclosed properties, it seems that banks and other lenders did not always comply with the exact legal requirements for foreclosure. Thus, some affected property-owners have gone to court. The details of these problems have been well-documented in the NY Times and other publications so I will not bother to recount them. A complicating factor is that many mortgages were packaged into securities which were then sold. Simply determining who owns a particular mortgage could be problematic.
As usual, the involved parties have different perspectives. Lenders have tended to minimize the difficulties as minor, little more than their failures to 'dot all the i's' in the relevant documents. On the other hand, consumer groups and lawyers whose clients' properties are in foreclosure suggest that the errors are serious. Ultimately, state supreme courts will resolve these issues. It is possible that the resolutions will differ significantly across states. Most interesting will be how the states that have seen the biggest collapses of the housing markets; those such as California, Florida, and Nevada; deal with the problems.
How could this affect the US economy? At best, a tempest in a teapot as my grandmother might have said. If so, the economy of the United States will start to grow more rapidly, probably starting in the second half of 2011. At worst, lenders will be more reluctant to lend than would otherwise be the case during an expansion and the economy returns to recession. Probably something in between these two extremes is most likely, so I expect that U.S. economic growth will remain tepid over the next year.
... and in Mexico and Belize? Another recession in the US would have negative impacts on Mexico. The United States is the destination for approximately 80% of Mexican exports. The recent US recession led to a reduction of more than 6% in Mexico's gross domestic product, much of the reduction occurred in the export sector. A double whammy of U.S. recession and the AH1N1 strain of the flu made the 2008-2009 tourist season dismal in Quintana Roo. Although the 2010-2011 period will probably be better than the year before, I expect a relatively slow winter season for tourism in the Caribbean this year. Tourism in Belize also suffers when the US is in recession. The over-valued Belize dollar will continue to suppress tourism in Belize.
In short, the foreclosure situation is a Gordian knot. Resolving the problem will be (to paraphrase Hobbes) nasty, brutish, but definitely not short.
Briefly, many who purchased homes in the real estate boom are behind in their payments. Lenders have foreclosed on many of these properties. During the second quarter of 2010, nonperforming loans, those more than 90 days past due, were 5.36% of total loans according to data from the Federal Reserve Bank of St. Louis (the graph is available at http://research.stlouisfed.org/fred2/graph/?s[1][id]=NPTLTL ) Mortgages currently account for a large share, but not all, of past due loans. Rates over 5% are extraordinarily high. Prior to 2009, the highest rate, 4.01%, occurred in 1991. Between 1995 and 2007 the rate averaged slightly more than 1%.
Until recently, the process of foreclosure has been relatively straightforward. A borrower does not pay, the lender sends (often nasty) notices, legal steps are taken and the lender takes over the property. Banks and other lenders typically do not want to own houses, so they usually try to sell the foreclosed properties. But, in part due to the shear volume of foreclosed properties, it seems that banks and other lenders did not always comply with the exact legal requirements for foreclosure. Thus, some affected property-owners have gone to court. The details of these problems have been well-documented in the NY Times and other publications so I will not bother to recount them. A complicating factor is that many mortgages were packaged into securities which were then sold. Simply determining who owns a particular mortgage could be problematic.
As usual, the involved parties have different perspectives. Lenders have tended to minimize the difficulties as minor, little more than their failures to 'dot all the i's' in the relevant documents. On the other hand, consumer groups and lawyers whose clients' properties are in foreclosure suggest that the errors are serious. Ultimately, state supreme courts will resolve these issues. It is possible that the resolutions will differ significantly across states. Most interesting will be how the states that have seen the biggest collapses of the housing markets; those such as California, Florida, and Nevada; deal with the problems.
How could this affect the US economy? At best, a tempest in a teapot as my grandmother might have said. If so, the economy of the United States will start to grow more rapidly, probably starting in the second half of 2011. At worst, lenders will be more reluctant to lend than would otherwise be the case during an expansion and the economy returns to recession. Probably something in between these two extremes is most likely, so I expect that U.S. economic growth will remain tepid over the next year.
... and in Mexico and Belize? Another recession in the US would have negative impacts on Mexico. The United States is the destination for approximately 80% of Mexican exports. The recent US recession led to a reduction of more than 6% in Mexico's gross domestic product, much of the reduction occurred in the export sector. A double whammy of U.S. recession and the AH1N1 strain of the flu made the 2008-2009 tourist season dismal in Quintana Roo. Although the 2010-2011 period will probably be better than the year before, I expect a relatively slow winter season for tourism in the Caribbean this year. Tourism in Belize also suffers when the US is in recession. The over-valued Belize dollar will continue to suppress tourism in Belize.
In short, the foreclosure situation is a Gordian knot. Resolving the problem will be (to paraphrase Hobbes) nasty, brutish, but definitely not short.
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