If economists ruled the country instead of politicians

Vrij Nederland
Erasmus School of Economics

Even though economists regularly are accused of never agreeing with one another, they often do. Unfortunately, politicians are not harmonious on these subjects as well. What are the topics for which there is agreement amongst economists but don't seem appealing to politicians? In an article from Vrij Nederland, Professor of Public Economics at Erasmus School of Economics Bas Jacobs discusses seven topics, accompanied by an analysis of the election programmes of political parties. 

Free trade

To many people, it is clear that globalisation has a lot of upsides to it. However, the downsides have become more apparent in the last years as well: due to an increased competition with low-wage countries, there are sectors in the Netherlands that experience a downward pressure on wages. By definition, not everyone will directly profit from free trade. Economists point to the idea that it is possible to compensate every loser by means of redistributing some of the gains of the people who profit from free trade. However, this thought pattern seems to mostly be a theoretical one; in practice, the outcomes are unsatisfactory. 

Competition

Considering the election programmes of political parties, we can only conclude that there seem to be no parties that propose more competition in markets. There is one peculiar exception to this stance: big internet companies such as Facebook, Google and Amazon are rightfully perceived as being too powerful. Free entrance and withdrawal from a market and competition can lead to efficiently operating markets, since companies have to keep on innovating and sell their products at competitive prices to survive competition. However, this concept has fallen out of grace: parties particularly oppose unfair competition that are based on competitive advantages as fiscal benefits or other barriers. A pure form of competition is hardly mentioned, not even by traditionally liberal parties. 

Taxes on real estate

Taxes on real estate are the most effective taxes possible: there are almost no disruptive effects on the real economy, because income from real estate doesn't require the one who profits from owning this form of physical capital to put in much effort. Furthermore, it is very hard to evade this type of taxes. Unfortunately, political parties are not willing to make use of this fiscal instrument. Right-wing parties could benefit from this policy, since the rate of taxes on revenue from hard work could be decreased. In addition, this policy would be worth it for left-wing parties, since it combats inequalities in income and wealth, within and between generations. Economists advocate that housing should be taxed accordingly, in the same manner as savings. Capital earnings on sold houses have to be taxed as well, but parties are scared to damage themselves. This particularly has to do with the fact that the Dutch electorate profits from the current fiscal system, which makes changing the system in any seemingly adverse way political suicide. 

Inheritance taxes

Most economists argue that inheritances have to be taxed more heavily. The majority of people don't even want to leave their children anything. This is a case of wealth for which the recipient doesn't have to do anything as well, which means that it can hardly be justified that that person has the right to be the sole beneficiary. Really wealthy people try to get their capital taxed even less than what is required by the current Act of Succession (Successiewet): they actively seek to find loopholes in the legislative system to transfer their wealth to the next generation almost tax-free (by means of so-called business succession). 

Pricing environmental damages

The famous economist Arthur Pigou advocated taxing companies that pollute their environment as soon as in 1911. Most economists are united on this topic as well: pricing greenhouse gases such as carbon dioxide should be done in the whole economic system. Everyone should pay for what he emits, without any exceptions, preferably via a European system. However, in politics, something strange is occurring: left-wing parties accuse the market mechanism of ruining sectors such as culture or health care, whereas they would like to leave pricing of pollution to the market. And right-wing parties leave the market mechanism to arrange markets in almost any situation, but are firmly opposed to doing the same with the pricing of emission allowances. This policy is contradictory on both sides of the political spectrum. The sixth point, introducing road pricing, is comparable to the case of pricing environmental damages: road pricing offers a solution to another externality, namely the fact that no individual discounts the interest of motorists as a whole and the possibility of serious congestions. By pricing congestion, congestions will belong to a thing of the past, leading to huge benefits in terms of efficiency and time. 

Capital requirements for banks

Banks take too much risk, because they are not exposed to the risk themselves. During the financial crisis of 2008, investments of banks were financed with 2% equity and 98% borrowed capital (!). By raising the capital requirements, we align the interests of banks with those of the community, since banks will feel the pain more when an investment turns south. In this way, financial crises can be avoided more easily and the effects of the crisis can be mitigated. After the crisis, capital requirements have been raised to a minimum of 3% equity. This is absolutely too little, since the risk of banks still is at minimum. Suggestions of economists are around 15%, which is a far more substantial ratio. 

More information

You can read the full article from Vrij Nederland, 13 March 2021, here