Trumps Tax rate cut Plan

Taken from our blog,”Brink of economic thought”

 

It has been nearly half year since the time when US presidential election produced one of surprising results. Since then we have seen many steps taken by elected president Trump. As of lately the geo political analysts are looking into the events transpiring within and around Korean peninsula and how would they impact the global situation. In these times within US president Trump has also made his intention clear about his promise to cut taxes and simplify the tax codes.

This was one of his promises which he pledged during his election campaign. How is it so that anything or even a minutest happening on the US economy makes such a big headlines? Given the context that US is the largest economy in the world, nearly 19 tn $, it is very natural that events there will be creating impact globally.

The proposed plan intends to fulfill various targets. This has been categorically remarked that objectives are to grow the economy and create millions of jobs. Tax deduction is expected to enhance the investment in major sectors of economy. Aim is also to lower the corporate tax rates from current highest in the world to the lowest in the world.

 

It is being considered as one of the most significant tax reform witnessed in US since 1986.There are certain steps which will be taken for individual reforms and business reforms and this will be discussed a little bit in the analysis.

Individual tax reforms

The plan proposes tax relief for American families and the ones which are middle income families by reducing the 7 tax brackets to mere 3 brackets of 10%, 25% and 35 %.Doubling the standard deduction.

There has been further simplification proposed by repealing of alternate minimal tax and repealing of death tax.

Business reforms

Among the list of business reforms few are 15 % business tax rates.

Territorial tax rates to level the playing field for American companies.

Elimination of tax breaks for special interest.

 

Trump is now planning to fully exempt the companies that are earning from overseas. It seems that administration’s measures to cut the tax rates will eventually increase the fiscal deficit. This has been one of the concerns which have been raised by many of analysts and economists about the situation that with already ballooning fiscal deficit this step may further widen the gap between revenues generates and expenses occurring.

However it will also to be watched as major portion of the plan if executed properly will be boosting economic output and creating more jobs.

There is an   observation made in pure economic terms that federal government has to borrow more money, while private entities have more money to invest.

Society actually ends up borrowing money at 1 to 2 percent and may be receiving 5 to 10 percent in return. That is a always a possibility  that society is going to receive a net gain, not bearing economic cost.

In total terms the deal appears more favorable than it may look at first. The new investment will not only create jobs but also some products for which the beneficiaries will not only be some peoples or wealthy peoples in the society but every section of the society.

Keynesian economics of demand side emphasis and huge governmental spending had defined many arguments in the last century. Those ideas which were conceptualized not only paved way for overcoming the depression of 1930s but also provided a unique direction to economic thinking , ideas and governmental policy formulation.

Now we find here that major of these investments will be done by corporate players. Rate of return on private investment is higher due to individual’s interest involved as compared to the federal government spending.

Now for the coming months this is to be seen that how will US president move with the plan in the congress. There is also one of the suspicions raised that too much personal income will be converted to business forms to reap the benefits of lower tax rates.

However Optimistic version of the move can be that this move will be beneficial in the long run and will be providing  boost to the economy.

 

 

Harsh Vardhan Pathak

 

Donald Trumps’ tax rate cut plan.- A short analysis.

US pulling out of Trans Pacific Partnership {TPP}

Taken from our blog,”Brinks of economic thoughts”

US pulling out of Trans Pacific Partnership {TPP}

 

{US has been witnessing many efforts to make changes in policies adopted during the time of Obama’s president ship. Obama had come up with Obamacare, an affordable health care act, which was intended to benefit nearly 25 million Americans. On Friday although Donald Trump did not succeed in removal, but he has been trying to alter the previous regimes policies. I am in this article trying to make a short note about USA’ s pulling from Trans Pacific Partnership}
US president Donald Trump had signed executive orders to pull out formally from negotiations for the process of Trans-Pacific Partnership. Had USA not pulled out of TPP trade deal, it would have been the world’s largest such deal in history. Protectionism can be argued. In a world which is now interrelated due to complex ties at economic and political level. Any of major or even minute steps do have their sets of repercussions. Globally we are seeing rise in sentiments, about ensuring that none of new steps must affect the benefits of local population.UK surprise exit from EURO union, or even Trump electoral win are an indication of rising dissatisfaction among the masses as of neo liberal policies which they seem to have affected their interest.

 

TPP was one among the major international trade initiatives taken by earlier US president Barrack Obama, so as to set new rules for trade in 21st century and bind the allies together to curtail the growing Chinese regional economic dominance.

It took nearly 5 years of series of thorough negotiations and discussions after which, TPP was signed by trade representatives in Feb 2016.But it had to be ratified by all of the individual countries.

TPP was conceived as an effective trade pact among the 12 pacific RIM nations,US,Japan,Malaysia,Vietnam,Singapore,Brunei,Australia,New Zealand,Canada,Mexico,Chile, and Peru. It was historically one among the most trend changing possible trade deals which could have been arrived at.

It intended to clearly slash the tariffs on most goods traded between countries which were participating in the deal. One of the interesting figures was that these nations are home for nearly 800 mn peoples, and also accounting for nearly 40 % of world’s trade. Ideally it could have created one unified market like EU.

While during the election campaign for US president ship in 2016, Trump had repeatedly referred to TPP as a “job killer” and a potential disaster” for the country. He had pointed it in one of his videos of US pulling out the moment he enters into the office. Trump had been contesting election on grounds of benefitting the nation’s economy, bringing jobs to USA.Many critics of the deal pointed to it “seeking fairer negotiations”.

 

It would have set new terms for trade and business investments among the nations, whose annual GDP stood as high as nearly 30 tn $.It also aimed to curtail the growing influence of China in the entire region. One of the independent studies conducted by a research think tank concluded that, Brack Obama wished to establish the “gold standard” of rules of the 21st Century. But it also had one shortcoming, as would have definitely resulted into increased US exports and imports, but not enhancements in US job figures.

China was also reluctant and very cautious of the development taking place. Had the deal come into practise, it would have straightway removed tariffs in full range of cases.Eg Japanese carmakers like Toyota, Nissan and Honda would have got cheaper access to US, one of their biggest export markets. Same way US vehicle exports would have found new markets if tariffs of close up to 70 % were slashed in countries like Vietnam and Malaysia, US farmers and poultry firms stood all chances to benefit, so did Vietnamese textiles goods.

There was immense discontent back in Trumps own constituency, TPP was looked as a reason for further job losses or stagnant wages, with many people already having discontent due to globalisation and trade agreements .

China looked up to TPP as a very suspicious move. It viewed it as a ploy by US to tighten its control over the region. Chinese media had sharply criticised the deal as “economic arm of US‘s geopolitical strategy to make sure that Washington rules supreme in the region”.

Many nations although still insist that they will move ahead even in absence of USA.

Same way we had seen Trump making comments about the H1B Visa program, which was used widely to hire cheap technology workers, who was widely believed to be taking jobs from US work force.

Any case, despite after USA pulling, the TPP cannot still be written off as nations still are willing to participate in it.

 

Harsh Vardhan Pathak

 

 

 

 

USA Sub Prime Mortgaze crisis 2008

This has been taken from our blog’Brinks of economic Thoughts”

USA SUB PRIME MORTGAGE CRISIS,,2008

 

‘It is believed that someone who has experienced near to death re-evaluates his priorities and values in life”

 

joseph stiglitz freefall

 

i had lots of memories of 2008 crisis,, me just sitting lone at home,,,who was  watching that oil prices are jumping 147 $ a barrel,,,just thenn saw lehmann brothers collapsing,,,and read in hindi news paper about details of crisis,,,

shrinking of Japanese economy,,,USA bailout,,indian rbi measures to inject nearly 1.75 lakhs cr in markets,,,,just to enhance demand,,[reminder of keynesian economics,,,increase demand]…

 

 

sources,,,

 

”freefall” joseph stiglitz,,,

 

”time for a visible hand-lesson from 2008 crisis”]

 

 

RECESSION OF 2008[SUB PRIME MORTGAGE CRISIS]

 

 

Sub prime mortgaze crisis  had been affecting USAs bank from 2006 itself,,,by 2008 start Bear sterns had suffered and was turned out to be a casuality…same was case with Freddie mac and Fannie Mae.

By September 2008,,we saw giant like Lehmann brothers collapsing,,,same was with Meryll lynch,,Wachovia,,and many prominent banks of USA,,,what transpired in USA did shock the entire world markets,,and lead to meltdown in global economy..

 

We saw Japanese economy shrinking for 2 consecutive quarters,,,in later part 0f 2008,,,we saw USAs government releasing bail out packages,,,Citigroup was to about to be bifurcated…

 

What were the main causes,,that has been discussed here..

 

Many factors contributed to the 2008 problem, including lax regulations and a flood of liquidity. There were incentives for providing misleading information and conflicts of interest. Two additional elements were present: incentives for excessive risk-taking and fraudulent behaviour (a problem that played an important role in the savings and loans, S&L, debacle).5 Perhaps more important though than these perverse incentives was a failure in modelling: a failure to understand the economics of securitization and the nature of systemic risk.

 

 

Few reason for crisis..

 

Incentive problem

 

Executives compensation system

 

Executive compensation schemes (combined with accounting regulations) encourage the provision of misleading information. Executives that are paid with stock options have an incentive to increase the market value of shares, and this may be more easily done by increasing reported income than byincreasing true profits.

 

Though the Sarbanes-Oxley Act of 2002 fixed some of

the problems that were uncovered in the Enron and related scandals, it did

nothing about stock options. With stock options not being expensed, shareholders often were not fully apprised of their cost. This provides strong incentives to pay exorbitant compensation through stock options.

 

-INCENTIVES FOR ACCOUNTING FIRMS

 

-SECURITISATION

 

-RATING AGENCY INCENTIVES

 

-NEW CONFLICTS OF INTEREST AND A NEW CULTURE:

REPEAL OF GLASS-STEAGALL

 

 

-THE BERNANKE-GREENSPAN PUT AND MORAL HAZARD

-CREATING A CREDIT FREEZE

 

-TRANSPARENCY AND COMPLEXITY

 

-INCENTIVES—AND OPPORTUNITIES—FOR FRAUD

 

-REGULATORY AND ACCOUNTING

ARBITRAGE,,MISPRICING RISK AND EXCESSIVE LEVERAGE

 

-Modeling Problems

 

-FAILING TO UNDERSTAND DIVERSIFICATION

DETECTING PONZI SCHEMES

 

INTELLECTUAL INCOHERENCE

 

The failure of the financial system to perform its essential functions:

 

  • Housing Price Bubble and Collapse.
  • Financial Market Freeze and Collapse.
  • US Housing Bubble created by
  • Low interest rates
  • Lax regulation of sub-prime mortgages with adjustable rates, two year teaser rates
  • Securitization of  mortgages, sold to unwary buyers as highly rated
  • US Bubble popped when
  • Interest rates rose in 2006, housing prices fell
  • Subprime mortgages and securities defaulted
  • Subprime Debt Obligations made in USA held around the world caused global financial shock.
  • Failure of Lehman Bros in September 2007 caused massive panic over counterparty risk. AIG required $180 billion bailout to cover Credit Default Swaps, insurance against bond defaults underwritten without reserves.

 

  • COURSE OF THE CRISIS

 

  • MORTGAGE CRISIS.

 

  • COLLAPSE OF COMMERCIAL REAL ESTATE

 

  • BANKING CRISIS

 

  • DECLINING VALUE OF EURO.

 

Few steps and suggestions to correct that crisis

 

It is believed that someone who has experienced near to death re-evaluates his priorities and values in life. There was a completer need to reform the economics and check the innovation economics. Something which can be referred as ‘’reform economics’’. There was need felt for efficient markets and markets with proper information.

 

We need to ensure that our resources are properly allocated, and we must shape our values properly, it is more about moral decline, and lack of peoples who take responsibility.

 

There were a series of financial sectors reform

 

A  strong and independent financial product safety commission to protect ordinary Americans against rampant abuses prevalent in the industry.

A systematic regulator who sees the system as whole.

 

Curbs  on excessive risk sharing.

 

Curbs  on derivatives.

 

Few things from this USA crisis later on transpired some effect to Euro zone crisis..

 

 

harsh vardhan pathak

msc integrated economics

doon university

 

sources 

 

‘It is believed that someone who has experienced near to death re-evaluates his priorities and values in life”

 

joseph stiglitz freefall

 

i had lots of memories of 2008 crisis,, me just sitting lone at home,,,who was  watching that oil prices are jumping 147 $ a barrel,,,just thenn saw lehmann brothers collapsing,,,and read in hindi news paper about details of crisis,,,

shrinking of Japanese economy,,,USA bailout,,indian rbi measures to inject nearly 1.75 lakhs cr in markets,,,,just to enhance demand,,[reminder of keynesian economics,,,increase demand]…

 

 

sources,,,

 

”freefall” joseph stiglitz,,,

 

”time for a visible hand-lesson from 2008 crisis”]

 

 

RECESSION OF 2008[SUB PRIME MORTGAGE CRISIS]

 

 

Sub prime mortgaze crisis  had been affecting USAs bank from 2006 itself,,,by 2008 start Bear sterns had suffered and was turned out to be a casuality…same was case with Freddie mac and Fannie Mae.

By September 2008,,we saw giant like Lehmann brothers collapsing,,,same was with Meryll lynch,,Wachovia,,and many prominent banks of USA,,,what transpired in USA did shock the entire world markets,,and lead to meltdown in global economy..

 

We saw Japanese economy shrinking for 2 consecutive quarters,,,in later part 0f 2008,,,we saw USAs government releasing bail out packages,,,Citigroup was to about to be bifurcated…

 

What were the main causes,,that has been discussed here..

 

Many factors contributed to the 2008 problem, including lax regulations and a flood of liquidity. There were incentives for providing misleading information and conflicts of interest. Two additional elements were present: incentives for excessive risk-taking and fraudulent behaviour (a problem that played an important role in the savings and loans, S&L, debacle).5 Perhaps more important though than these perverse incentives was a failure in modelling: a failure to understand the economics of securitization and the nature of systemic risk.

 

 

Few reason for crisis..

 

Incentive problem

 

Executives compensation system

 

Executive compensation schemes (combined with accounting regulations) encourage the provision of misleading information. Executives that are paid with stock options have an incentive to increase the market value of shares, and this may be more easily done by increasing reported income than byincreasing true profits.

 

Though the Sarbanes-Oxley Act of 2002 fixed some of

the problems that were uncovered in the Enron and related scandals, it did

nothing about stock options. With stock options not being expensed, shareholders often were not fully apprised of their cost. This provides strong incentives to pay exorbitant compensation through stock options.

 

-INCENTIVES FOR ACCOUNTING FIRMS

 

-SECURITISATION

 

-RATING AGENCY INCENTIVES

 

-NEW CONFLICTS OF INTEREST AND A NEW CULTURE:

REPEAL OF GLASS-STEAGALL

 

 

-THE BERNANKE-GREENSPAN PUT AND MORAL HAZARD

-CREATING A CREDIT FREEZE

 

-TRANSPARENCY AND COMPLEXITY

 

-INCENTIVES—AND OPPORTUNITIES—FOR FRAUD

 

-REGULATORY AND ACCOUNTING

ARBITRAGE,,MISPRICING RISK AND EXCESSIVE LEVERAGE

 

-Modeling Problems

 

-FAILING TO UNDERSTAND DIVERSIFICATION

DETECTING PONZI SCHEMES

 

INTELLECTUAL INCOHERENCE

 

The failure of the financial system to perform its essential functions:

 

  • Housing Price Bubble and Collapse.
  • Financial Market Freeze and Collapse.
  • US Housing Bubble created by
  • Low interest rates
  • Lax regulation of sub-prime mortgages with adjustable rates, two year teaser rates
  • Securitization of  mortgages, sold to unwary buyers as highly rated
  • US Bubble popped when
  • Interest rates rose in 2006, housing prices fell
  • Subprime mortgages and securities defaulted
  • Subprime Debt Obligations made in USA held around the world caused global financial shock.
  • Failure of Lehman Bros in September 2007 caused massive panic over counterparty risk. AIG required $180 billion bailout to cover Credit Default Swaps, insurance against bond defaults underwritten without reserves.

 

  • COURSE OF THE CRISIS

 

  • MORTGAGE CRISIS.

 

  • COLLAPSE OF COMMERCIAL REAL ESTATE

 

  • BANKING CRISIS

 

  • DECLINING VALUE OF EURO.

 

Few steps and suggestions to correct that crisis

 

It is believed that someone who has experienced near to death re-evaluates his priorities and values in life. There was a completer need to reform the economics and check the innovation economics. Something which can be referred as ‘’reform economics’’. There was need felt for efficient markets and markets with proper information.

 

We need to ensure that our resources are properly allocated, and we must shape our values properly, it is more about moral decline, and lack of peoples who take responsibility.

 

There were a series of financial sectors reform

 

A  strong and independent financial product safety commission to protect ordinary Americans against rampant abuses prevalent in the industry.

A systematic regulator who sees the system as whole.

 

Curbs  on excessive risk sharing.

 

Curbs  on derivatives.

 

Few things from this USA crisis later on transpired some effect to Euro zone crisis..

 

 

harsh vardhan pathak

msc integrated economics

doon university

 

Role of [federal reserve]one central bank,,,in last 5 years,, Specific reference to role of federal reserve in 2008 aftermath,,

This has been used from our blog’Brinks of economic thoughts”

 

Role of [federal reserve]one central bank,,,in last 5 years,, Specific reference to role of federal reserve in 2008 aftermath,,

What is s central bank?

 

Central bank is central agency

It   stands at the centre of national banking system.

Played  a key role in in development of modern monetary system.

Mission of central bank?

Macroeconomic   stability.

Low and stable inflation  , increased growth and employment.

Financial  stability.

To ensure that nations financial system functions properly, avoids  and prevents financial panics.

 

Policy tools of central bank

 

Monetary policy.

Adjusting lever of  short  term interest rates, to influence spending, production, investment.

Provision  of liquidity.

For short term finance and ensuring that financial institutions do not collapse, they provide liquidity, thus acting as lender of last resort.

 

Financial regulation and supervision.

 

Central banks do ensure supervision, thus reducing loss of confidence of public and minimising financial panics.

Role during  crisis as lender of last resort in 2008 crisis.

Lessons from  great depression.

In a financial panic central bank need to lend freely to halt runs and restore functioning.

Highly accommodative financial policy helps support economic recovery and employment.

Global response was,

Prevent fallout of globally important financial institutions.

Work to normalise credit market.

Restore depositors  confidence.

Ensure financial institutions access to funds.

 

Federal reserve action.

 

Federal lends to bank through credit facility called discount window.

Maturity of discount loan was extended and interest rates reduced.

Regular  auctions of discount window funds was conducted to encourage participation of financial firms.

All loans were required to be secured by collaterals.

New programs allowed to provide liquidity to  financial  institutions and end illiquidity problems.

Purpose was to enhance stability of financial system.

Promote availability of funds to US business and house hold and thus ensure recovery

 

Institutions and markets covered by fed ‘s action of last resort.

 

Banks [through discount window]

Brokers –dealers[financial firms that deal in securities and derivatives]

Commercial paper borrowers

Money market funds

Asset backed securities markets

Federal reserve established special programme to repair functioning in CP market and restart flow of credit.

In march 2008,,fed had facilitated take over of failed broker-dealer, bear sterns by bank JP Morgan chase.

In oct 2008 fed intervened by takeover of largest insurance company AIG .o prevent its collapse,fed reserve loaned 85 bn $ using AIG assets as ciollaterals.rescue of AIG prevented even greater shocks to wodl economy.

Fed worked closely with regulatory bodies such as FDIC and SEC,

Coordinated with foreign nbanks by issuing foreign currency swaps.

Fed led the stress test in start of 2009 of 19 banks,which helped restoring investors confidence and allowed banks to raise private capital.

Followed conventional monetary policy during financial crisis.

Fed reduced federal funds rate from 5.25 to nearly  0.

Fed undertook large scale purchases of treasury government sponsored enterprises mortgage related securities.

Large scale assets purchases.[also known as quantitative easing]

 

Harsh vardhan pathak

 

Short note on great Depression

This has been used from our blog,’Brinks of economic thoughts”

Short note on great depression.

 

{One of the most interesting topics in financial economics,financial crisis ,

And what can be more interesting that 1930s crisis which not only shocked the global economy but also paved way for emphasis on the demand side of economy than the supply side by great economist J M Keynes}

 

In 1929 world was hit by great depression. In USA stocks markets crashed in October 1929.and largest bank in Austria failed in 1931.Output and prices fell in many nations and many fell political turmoil.

 

Depression continued until the USA entered in WW2.

 

 

CAUSES OF GREAT DEPRESSION.

Economic and financial repercussions of WW1 including effects of reparations payment.

 

Structure of international  gold  standard.

 

Bubble in stock prices.

 

Financial  panic and collapse of major financial institutions.

 

LIQUIDATIONIST  THEORY which viewed depression as a necessary corrective to the excesses of 1920s.

 

’liquidate labor,,liquidate stocks,,liquidate farmers,,liquidate real estates.’’

 

Andrew Mellon, Secretary of treasury ,1931.

 

Monetary  policy errors.

 

Tightening  of monetary policy in 1928 and 1929 to stem stock market speculation.

 

Policy  tightening in 1931 to halt a speculative attack on dollar.

Policy  inaction in 1932, despite high unemployment and falling prices.

 

Tight monetary policy led to sharp decline in prices and steep declines in output and employment.

 

Effects of policy error were globally transmitted through gold standard.

 

Fed kept the money tight in part as it wanted to preserve the gold standard.

 

Franklin D Roosevelt abandoned gold standard in 1933 and then deflation ended.

 

Fed responded inadequately to bank runs and contraction on bank lending, providing only minimal credits to bank.

Bank failures swept the country, nearly 9700 out of 25,000 banks suspended operations between 1929 and 1933.bank failures continued until deposit insurance was formed in 1934.

 

Fed appeared to be  believing the liquidationist  theory that banking and credit had expanded too much and needed to be reduced.

 

Franklin d Roosevelt tried many steps to end recession.

 

Deposit insurance for banks ended run.

Abandonment of gold standard allowed money supply to increase  and end deflation.

 

Federal Reserve failed in both its mission.

It did not use monetary policy to prevent deflation and fall in output and employment.

It did not adequately use its function of last resort, allowing many bank failures and a resulting contraction in credit.

 

Academically this crisis left many situations to be studied by academics, wide lessons were learnt, and it was a major happening of the previous century.

 

Harsh vardhan pathak

Msc economics