The visible hand in economics

Archive for the ‘Euro/UK economics’ Category

So the British are increasing the international departure tax, and stating that it is an “externality tax”.  What spectacularly wrong-headed logic.

The externality they are talking about is “carbon emissions” – now as long as they tax the fuel that airlines use the externality is accounted for, as the carbon emissions stem from fuel use.  Adding a tax on top of an efficient externality tax is not efficient.

The real reason the British government is doing this is straight out protectionism – they believe that the impact on “outflows” from Britain will exceed the impact on tourist “inflows”, a factor that would improve net exports and help to “protect” the retail industry in Britain.  Beyond this, the increase in tax is also a simple tax grab – one that taxes tourist industries the rest of the world over.

No wonder we in New Zealand are unhappy (*, *)

In the Financial Times, Martin Feldstein wrote about the difference between the EU and US monetary setting regimes – specifically he wanted to answer why the EU was lifting rates, while the US had been cutting. (ht Greg Mankiw).

Ultimately, he puts this difference down to a number of factors:

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An interesting article by Sebastian Mallaby discussed the contrary monetary policy strategies of the US Federal Reserve (cut rates to avoid a recession) and the European Central bank (keep rates elevated to avoid inflation). (h.t. Greg Mankiw)

In the article, Mallaby alludes to the view that the US Federal Reserve might feel that it is the greater protector of the world economy – this takes for granted the positive externalities to the rest of the world from the Fed cutting rates. These are:

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