Economy

Investing.com — The European Central Bank will have to continue raising interest rates after this month’s meeting, in the light of strong underlying inflation, the ECB’s chief economist Philip Lane said on Monday. “The current information on underlying inflation pressures suggests that it will be appropriate to raise rates further beyond our March meeting,” Lane, an influential figure on the ECB’s Frankfurt-based directorate, said in a speech in Dublin, although he didn’t commit the extent of any further tightening beyond March. “While there has been a clear turnaround in energy inflation and there are some signs of deceleration for food inflation, momentum for core inflation has not declined,” Lane explained, highlighting that “momentum in the goods category remains strong.”Higher-than-expected consumer inflation data for February – especially core inflation, which accelerated to 5.6% – had triggered a sharp selloff in Eurozone bonds last week, with investors moving to price in expectations that the ECB may raise its deposit rate to an all-time high of 4% by the end of the year, and only start to reverse course in 2024. The ECB has all but nailed on a 50-basis point increase in its three key rates at its meeting on March 16. Many analysts have also started to predict a similar hike at the following meeting in May. The comments from Lane, arguably the most senior ‘dove’ at the ECB, suggests there is little resistance to that idea in Frankfurt.Lane acknowledged that the unwinding of various price shock effects from the pandemic and Russia’s invasion of Ukraine may unwind only gradually, keeping headline inflation high enough for long enough to cause an upward shift in inflation expectations among the population. However, at the same time, he argued that the impact of changes in energy prices on core inflation appeared to be more immediate now than it had been before the pandemic, holding out the hope that the collapse of wholesale energy prices in the last few months may quickly be reflected in declines in the headline rate of inflation.The euro was broadly flat after Lane’s speech. By 06:00 ET (11:00 GMT), it was down less than 0.1% at $1.0627. Ten-year bond yields, however, came down strongly, with the German Bund yield falling 7 basis points to 2.58% and the Italian BTP yield falling 11 basis points to 4.43%. More

As they escalate a debt-limit standoff, House Republicans blame President Biden’s spending bills for an increase in deficits. Voting records show otherwise.WASHINGTON — President Biden will submit his latest budget request to Congress on Thursday, offering what his administration says will be $2 trillion in plans to reduce deficits and future growth of the national debt.Republicans, who are demanding deep spending cuts in exchange for raising the nation’s borrowing cap, will almost certainly greet that proposal with a familiar refrain: Mr. Biden and his party are to blame for ballooning the debt.But an analysis of House and Senate voting records, and of fiscal estimates of legislation prepared by the nonpartisan Congressional Budget Office, shows that Republicans bear at least equal blame as Democrats for the biggest drivers of federal debt growth that passed Congress over the last two presidential administrations.The national debt has grown to $31.4 trillion from just under $6 trillion in 2000, bumping against the statutory limit on federal borrowing. That increase, which spanned the presidential administrations of two Republicans and two Democrats, has been fueled by tax cuts, wars, economic stimulus and the growing costs of retirement and health programs. Since 2017, when Donald J. Trump took the White House, Republicans and Democrats in Congress have joined together to pass a series of spending increases and tax cuts that the budget office projects will add trillions to the debt.The analysis is based on the forecasts that the C.B.O. regularly issues for the federal budget. They include descriptions of newly passed legislation that affects spending, revenues and deficits, tallying the costs of those new laws over the course of a decade. Going back to the start of Mr. Trump’s tenure, those reports highlight 13 new laws that, by the C.B.O.’s projections, will combine to add more than $11.5 trillion to the debt.Nearly three-quarters of that new debt was approved in bills that gained the support of a majority of Republicans in at least one chamber of Congress. Three-fifths of it was signed into law by Mr. Trump.Some of those bills were in response to emergencies, like the early rounds of stimulus payments to people and businesses during the pandemic. Others were routine appropriations bills, which increased spending on the military and on domestic issues like research and education.Understand the U.S. Debt CeilingCard 1 of 5What is the debt ceiling? More

South Korea and Japan have announced a series of measures to ease tensions over wartime forced labour and recent trade restrictions, which the US welcomed as a “groundbreaking” step to improve ties between its two most important regional allies.South Korean foreign minister Park Jin on Monday said South Korea’s private sector, which was compensated under a 1965 treaty with Japan, would pay into a public foundation for victims of forced labour during the second world war.Just hours after Seoul’s announcement, Tokyo said it would launch talks to ease export controls imposed in 2019 on chemicals vital to South Korea’s semiconductor industry. South Korea said it would suspend a complaint lodged against Japan with the World Trade Organization while the talks proceeded.The efforts by Japan and South Korea to repair strained relations come after the US pressed for reconciliation between its Pacific allies to counter China’s regional assertiveness and to deter nuclear-armed North Korea.Japanese prime minister Fumio Kishida said Seoul’s proposed fund would help “to return relations between Japan and South Korea to a healthy state”. US president Joe Biden hailed the plan as “a critical step to forge a future for the Korean and Japanese people” in a “free and open Indo-Pacific”.But it drew immediate backlash from victims and opposition parties for failing to compel payments from Japanese companies.The leader of South Korea’s main opposition Democratic party called the plan “humiliating” and accused President Yoon Suk Yeol’s administration of choosing “the path to betray historical justice”.Lim Jae-sung, a lawyer for several victims, wrote in a Facebook post: “It is a complete victory by Japan, which has said it cannot pay a single yen on the forced labour issue.”Ties between Tokyo and Seoul disintegrated in 2018 after South Korea’s Supreme Court ordered two Japanese companies — Mitsubishi Heavy Industries and Nippon Steel & Sumitomo Metal — to pay victims of forced labour.The same year, a separate deal brokered by Kishida, then foreign minister, to compensate South Korean victims of sexual slavery collapsed.Tokyo has rejected calls for compensation from Japanese companies, insisting that all claims related to its colonial occupation of the Korean peninsula from 1910 to 1945 were resolved by the 1965 treaty.Japan’s foreign minister Yoshimasa Hayashi said on Monday that the government would not object to Japanese companies making voluntary contributions to the fund. He said Kishida’s administration endorsed a 1998 expression of “deep remorse and heartfelt apology” for colonial rule.Analysts said leadership changes in South Korea and Japan had brightened the prospects of a thaw. Yoon last week said Japan had “transformed from a militaristic aggressor of the past into a partner that shares the same universal values with us”.

People close to both governments said Yoon could visit Tokyo as soon as later this month.For Japan, tensions with South Korea had complicated efforts to bolster regional defence efforts with the US. “The speed with which the two countries reached this deal shows that they share a deep understanding of the deterioration in the security environment,” said Kohtaro Ito at the Canon Institute for Global Studies.Experts, however, said South Korea’s options had been limited by Japan’s refusal to make significant concessions on the 1965 treaty.“It is hard to move bilateral relations forward without resolving the forced labour issue,” said Park Cheol-hee, professor of Japanese politics at Seoul National University. “The government seems to have made a political decision to compensate the victims quickly.” More

New evidence shows that many employers are mislabeling rank-and-file workers as managers to avoid paying them overtime.For four years beginning in 2014, Tiffany Palliser worked at Panera Bread in South Florida, making salads and operating the register for shifts that began at 5 a.m. and often ran late into the afternoon.Ms. Palliser estimates that she worked at least 50 hours a week on average. But she says she did not receive overtime pay.The reason? Panera officially considered her a manager and paid her an annual salary rather than on an hourly basis. Ms. Palliser said she was often told that “this is what you signed up for” by becoming an assistant manager.Federal law requires employers to pay time-and-a-half overtime to hourly workers after 40 hours, and to most salaried workers whose salary is below a certain amount, currently about $35,500 a year. Companies need not pay overtime to salaried employees who make above that amount if they are bona fide managers.Many employers say managers who earn relatively modest salaries have genuine responsibility and opportunities to advance. The National Retail Federation, a trade group, has written that such management positions are “key steps on the ladder of professional success, especially for many individuals who do not have college degrees.”But according to a recent paper by three academics, Lauren Cohen, Umit Gurun and N. Bugra Ozel, many companies provide salaries just above the federal cutoff to frontline workers and mislabel them as managers to deny them overtime.Because the legal definition of a manager is vague and little known — the employee’s “primary” job must be management, and the employee must have real authority — the mislabeled managers find it hard to push back, even if they mostly do grunt work.The paper found that from 2010 to 2018, manager titles in a large database of job postings were nearly five times as common among workers who were at the federal salary cutoff for mandatory overtime or just above it as they were among workers just below the cutoff.“To believe this would happen without this kind of gaming going on is ridiculous,” Dr. Cohen, a Harvard Business School professor, said in an interview.Under federal law, employers are required to pay time-and-a-half overtime to salaried workers after 40 hours if they make about $35,500 or less.Scott McIntyre for The New York TimesDr. Cohen and his co-authors estimate that the practice of mislabeling workers as managers to deny them overtime, which often relies on dubious-sounding titles like “lead reservationist” and “food cart manager,” cost the workers about $4 billion per year, or more than $3,000 per mislabeled employee.And the practice appears to be on the rise: Dr. Cohen said the number of jobs with dubious-sounding managerial titles grew over the period he and his co-authors studied.Federal data appear to underscore the trend, showing that the number of managers in the labor force increased more than 25 percent from 2010 to 2019, while the overall number of workers grew roughly half that percentage.From 2019 to 2021, the work force shrank by millions while the number of managers did not budge. Lawyers representing workers said they suspected that businesses mislabeled employees as managers even more often during the pandemic to save on overtime while they were short-handed.“There were shortages of people who had kids at home,” said Catherine Ruckelshaus, the general counsel of the National Employment Law Project, a worker advocacy group. “I’m sure that elevated the stakes.”But Ed Egee, a vice president at the National Retail Federation, argued that labor shortages most likely cut the other way, giving low-level managers the leverage to negotiate more favorable pay, benefits and schedules. “I would almost say there’s never been a time when those workers are more empowered,” he said. (Pay for all workers grew much faster than pay for managers from 2019 to 2021, though pay for managers grew slightly faster last year.)Experts say the denial of overtime pay is part of a broader strategy to drive down labor costs in recent decades by staffing stores with as few workers as possible. If a worker calls in sick, or more customers turn up than expected, the misclassified manager is often asked to perform the duties of a rank-and-file worker without additional cost to the employer.“This allows them to make sure they’re not staffing any more than they need to,” said Deirdre Aaron, a former Labor Department lawyer who has litigated numerous overtime cases in private practice. “They have assistant managers there who can pick up the slack.”Ms. Palliser said that her normal shift at Panera ran from 5 a.m. to 2 p.m., but that she was often called in to help close the store when it was short-staffed. If an employee did not show up for an afternoon shift, she typically had to stay late to cover.Gonzalo Espinosa said that he had often worked 80 hours a week as the manager of a Jack in the Box but that he had not received overtime pay.Max Whittaker for The New York Times“I would say, ‘My kids get out of school at 2. I have to go pick them up, I can’t keep doing this,’” said Ms. Palliser, who made from about $32,000 to $40,000 a year as an assistant manager. She said her husband later quit his job to help with their child-care responsibilities.She won a portion of a multimillion-dollar settlement under a lawsuit accusing a Panera franchisee, Covelli Enterprises, of failing to pay overtime to hundreds of assistant managers. Panera and representatives of the franchise did not respond to requests for comment.Gassan Marzuq, who earned a salary of around $40,000 a year as the manager of a Dunkin’ Donuts for several years until 2012, said in a lawsuit that he had worked roughly 70 hours or more in a typical week. He testified that he had spent 90 percent of his time on tasks like serving customers and cleaning, and that he could not delegate this work “because you’re always short on staff.”Mr. Marzuq eventually won a settlement worth $50,000. A lawyer for T.J. Donuts, the owner of the Dunkin’ Donuts franchise, said the company disputed Mr. Marzuq’s claims and maintained “that he was properly classified as a manager.”Workers and their lawyers said employers exploited their desire to move up the ranks in order to hold down labor costs.“Some of us want a better opportunity, a better life for our families,” said Gonzalo Espinosa, who said that in 2019 he often worked 80 hours a week as the manager of a Jack in the Box in California but that he did not receive overtime pay. “They use our weakness for their advantage.”Mr. Espinosa said his salary of just over $30,000 was based on an hourly wage of about $16 for a 40-hour workweek, implying that his true hourly wage was closer to half that amount — and well below the state’s minimum wage. The franchise did not respond to requests for comment.The paper by Dr. Cohen and his co-authors includes evidence that companies that are financially strapped are more likely to misclassify regular workers as managers, and that this tactic is especially common in low-wage industries like retail, dining and janitorial services.Still, lawyers who bring such cases say the practice also occurs regularly in white-collar industries such as tech and banking.When companies are financially strapped or in low-wage industries like retail and fast food, they are more likely to misclassify regular workers as managers, a recent report found.Max Whittaker for The New York Times“They have a job title like relationship manager or personal banker, and they greet you, try to get you to open account,” said Justin Swartz, a partner at the firm Outten & Golden. “They’re not managers at all.”Mr. Swartz, who estimated that he had helped bring more than two dozen overtime cases against banks, said some involved a so-called branch manager inside a big-box store who was the only bank employee on site and largely performed the duties of a teller.The practice appears to have become more difficult to root out in recent years, as more employers have required workers to sign contracts with mandatory arbitration clauses that preclude lawsuits.Many of the cases “are not economically viable anymore,” said Mr. Swartz, citing the increased difficulty of bringing them individually through arbitration.Some lawyers said only an increase in the limit below which workers automatically receive overtime pay is likely to meaningfully rein in misclassification. With a higher cutoff, simply paying workers overtime is often cheaper than avoiding overtime costs by substantially increasing their pay and labeling them managers.“That’s why companies fought it so hard under Obama,” said Ms. Aaron, a partner at Winebrake & Santillo, alluding to a 2016 Labor Department rule raising the overtime limit to about $47,500 from about $23,500. A federal judge suspended the rule, arguing that the Obama administration lacked the authority to raise the salary limit by such a large amount.The Trump administration later adopted the current cutoff of about $35,500, and the Biden administration has indicated that it will propose raising the cutoff substantially this year. Business groups say such a change will not help many workers because employers are likely to lower base wages to offset overtime pay. More

Good morning. After weeks of climbing higher, yields fell on Friday, setting off a relief rally in stocks. Suspects include dovish Fedspeak and erratic services activity data. Neither seems terribly durable to us. Higher for longer is the unmistakable drumbeat coming from the Fed.Today, we look ahead to a choice the central bank may well face later this year, which has been attracting interest on Wall Street. Email us: [email protected] and [email protected] the Fed might fudgeThe Federal Reserve has pledged to keep inflation somewhere around 2 per cent. Here is one problem with that:If inflation is largely unpredictable, and hence not finely controllable, then . . . the central bank could always argue that wide misses were the result of bad luck, not bad faith . . . This possible escape hatch for the central bank . . . suggests that building up credibility for its inflation-targeting framework could be a long and arduous process.This, from a 1997 paper by Ben Bernanke and Frederic Mishkin, captures why there is so much hand-wringing anytime someone suggests the Fed ditch its 2 per cent inflation target. Central bank credibility — often defined as its ability to influence long-term interest rates through the short-term policy rate and strategic communication — is hard-won and easily lost. Changing the well-established 2 per cent target risks throwing years of hard-earned credibility away.Might the Fed do it anyway? On that question, Jay Powell is very tight-lipped. But later this year, he could face an agonising choice between abandoning 2 per cent or engineering a recession. Inflation is an enigma, but as Don Rissmiller of Strategas has argued for months, history suggests it is symmetrical; it falls about as fast as it rises. This implies there is a long way to go, with mounting job losses along the way. It’s no large leap to imagine a scenario where inflation is falling but still above target, while unemployment is rising but not yet recessionary. The political pressure to loosen policy would be immense. The Fed might conclude raising its inflation target, or at least acting chill about enforcing it, is the best of a bad set of options.On the merits, though, the case for a higher inflation target — perhaps 3 per cent — is strong. First, it lets prices adjust more flexibly. In general people like price cuts but hate wage cuts, an asymmetry that makes downturns more violent. Firms have to slow price growth but can’t do the same for wages, so they stop hiring instead. Research suggests running inflation a touch hotter gives prices more room to move, dampening the hit to employment and growth.Second, and more importantly, a higher inflation target keeps rates further from the dreaded zero lower bound. At the ZLB, cutting rates doesn’t do much and the policy alternatives, such as quantitative easing, are messy and more poorly understood. Policy rates are set in nominal terms, but the larger policy stance (how tight or easy monetary policy is) depends on real rates, which in turn depends on inflation. Running inflation hotter would produce higher nominal rates for any given policy stance. That would give the Fed more room to lower nominal rates when it needs to. Even critics of a higher target nod to this. They counter on different grounds. Maybe 2 per cent isn’t theoretically optimal, but moving to 3 per cent, especially now, would wreck Fed credibility. As Jonathan Pingle, chief US economist at UBS, put it to us:If the central bank suddenly said, ‘OK, our inflation target is 2, we’re not meeting that target, so we’re gonna make the target 3’, then immediately the next question for most economic agents should be: ‘well, maybe they’ll turn around and make it 4’. And if they do that, maybe they’ll turn around and make it 5. That logic is a slippery slope . . . Once it starts to erode [it] creates real problems for the effectiveness of monetary policy.Those problems might include long rates pricing in a big inflation risk premium the Fed can’t dislodge. Last year’s UK gilts crisis shows what can happen in the short run when policymakers lose credibility, notes Michael Metcalfe of State Street Global Markets. Nothing good. Even if something that extreme is unlikely, he thinks a “bond market buyers’ strike” can’t be ruled out.Thundering into this discussion is Olivier Blanchard, the French economist who has for a decade (including in the FT last year) advocated a higher inflation target. Blanchard told Unhedged he thinks the case for a higher target is “overwhelming”. As an academic matter, few would dispute that. But in policymaking terms, too, he downplays the risks to credibility:I think, in the right environment, a one-time goalpost move would be credible. There is no slippery slope here. It is clear that the earlier conclusions and computations that 2 per cent was the right target, and the probability of hitting the ZLB was small, were wrong. I think any reasonable economist, including [Harvard’s Kenneth Rogoff and Gramercy’s Mohamed El-Erian], agree about that. I think there is zero risk of moving the target further and further. I heard the same argument about credibility when central banks started QE. The point here is that context matters. Dropping anchor at 3 per cent — a still-low inflation rate that makes rate-setting easier in the long run — as the price of avoiding a recession wouldn’t mean the Fed has tossed out its inflation mandate. It means it’s weighing the balance of risks and picking the better option. As we like to say, it makes no sense to do stupid policy in the name of credibility.However, Blanchard concedes that some credibility hit is likely. Rather than an inflammatory formal target change, he expects a Fed fudge: When inflation is down to, say, 3 per cent, at some stage in, hopefully, the not too distant future, I am nearly sure the debate will be: Are we willing to further increase unemployment in order to get to 2 per cent, or should we revisit?I suspect the debate will be muddled, central banks will not formally change their target, but will be more relaxed about getting to 2 per cent. As Andy Haldane pointed out in the FT on Friday, a less aggressive attitude towards the speed of disinflation, once it is clear that policy is tight enough (not there yet!), is the Fed’s hidden policy tool. “They don’t talk about this as a lever,” adds Claudia Sahm, the former Fed economist now at Sahm Consulting. “But the reality is that it’s very fuzzy, and not by accident.” Some discretion over “when, and how fast, and how long” would help “take some pressure off of this 2 per cent vs 3 per cent” debate, she says.But make no mistake: the Fed exercising discretion is a policy choice, carrying many of the same risks as an explicit target change. Sahm points out that before the pandemic, the central bank considered changing its target to 3 per cent, but declined to do so. The Fed likes 2 per cent inflation, in other words. Giving that up to avoid a recession would be defensible. But that decision feels precarious indeed.One good readIn his widely read annual letter, Dan Wang on China’s lockdowns: “Weibo censored the first line of the national anthem: ‘Arise, you who refuse to be slaves.’” More

Longtime macro disaster tourists eurozone-watchers will know that one of the thorniest problems Europe faced in the post-financial crisis decade was unanchored inflation expectations — on the downside.No matter how desperately the ECB tried to reflate the eurozone, inflation expectations — as measured by the “break-even” rate differential between inflation-proofed and conventional government bonds — kept sagging. “Japanification” was all everyone talked about. Even several years of negative interest rates, started in large part in a desperate attempt to change the narrative, did zip. But check out this Morgan Stanley chart:That inflation break-even rates have jumped everywhere is natural, given what actual inflation has done. But the 10-year German break-even rate — a decent proxy for long term expectations for the eurozone as a whole — has shot up above the US rate for the first time since 2009. As Morgan Stanley’s Andrew Sheets said in a note on some current market narratives yesterday evening (his emphasis below):. . . the eurozone may now have a more lasting inflation problem: Again, price has been very supportive of this story. Both yields and inflation expectations have jumped; Germany 10-year inflation break-evens are now ~20bp higher than in the US, the largest such gap since 2009.Inflation in the eurozone is high, with upside surprises this week, leading our economists to add another expected hike. But again, this narrative is facing an interesting near-term test: The cost of energy continues to fall, while all prices are about to lap the one-year anniversary of Russia’s invasion of Ukraine. As the calendar flips from February to March, year-on-year data will get very noisy.Last March, the average month-ahead price of EU gas (TTF) was ~€128/MWh. It is currently €47/MWh, 63% lower. Assuming current prices hold, year-on-year declines get larger as we move further into the year, one reason why we forecast inflation to moderate — significantly — over the course of 2023.Eurozone inflation could be more persistent. But take a step back and consider just how much confidence the market used to have in the other direction. Have all those structural drivers of lower growth and inflation really gone away? If they have, eurozone banks, at ~8x earnings and a ~5% yield, could still have significant upside. If they haven’t, market expectations that inflation will be higher in Germany than the US over the next decade look vulnerable.To be honest, we’re inclined to agree with Sheets. It’s hard to see how inflation can become entrenched in Europe given ~gestures helplessly at everything and anything~ well, you know. But not so long ago it looked unlikely that European break-evens ever jump over US ones in our lifetimes. So who knows? More

America leads on innovation, and Europe on regulation, or so the conventional wisdom goes. But recently, the US seems to have taken the lead in the latter, particularly in politically powerful industries like technology, pharma and finance. Just last week, Eli Lilly, the producer of popular insulin medications Humalog and Humulin, pledged to reduce its insulin list prices by 70 per cent in an effort to make the medicine more affordable. The move was seen as a direct response to Joe Biden’s policy pressure on Big Pharma. In June 2022, the Federal Trade Commission issued a unanimous policy statement criticising pharmaceutical middlemen, known as pharmacy benefit managers, for taking illegal bribes and rebates to keep prices high.Some competition experts say this supports the theory that even the threat of tough antitrust action can be enough to nudge companies in the right direction. And the threats from American regulators seemed far greater than those from their European peers at a high-profile competition conference in Brussels last week, which brought together policymakers, economists, lawyers and politicians from both sides of the Atlantic.EU competition commissioner Margrethe Vestager gave the opening speech, which was critical of the US Inflation Reduction Act for offering subsidies to American manufacturers as part of the clean energy transition. But Vestager seemed far less of a force than she did a few years ago. Rather, it was the energetic crop of young American regulators who were the rock stars of the event, complete with their own swag — fan mugs emblazoned with “Wu&Khan&Kanter” were spotted in the venue.Certainly, Team USA seemed to be thinking bigger and broader than its EU peers. FTC commissioner Rebecca Slaughter stressed that her agency was making policy based on how “people participate in the economy as whole people”, not just as consumers. The Justice Department officials in attendance made it clear they were going after entirely new areas, like labour markets, with a competition lens, and pursuing criminal as well as civil penalties for violators.American regulators have become more ambitious because they believe the stakes are so high. They view their work not in technocratic but existential terms; a battle against the risk of corporate oligopoly which threatens liberal democracy. Many of their European peers, meanwhile, still think in terms of narrow definitions of consumer pricing, which is perhaps why the average number of mergers prohibited by the European Commission’s directorate-general for competition per year over the past three decades is only one, as Imperial College economist Tommaso Valletti pointed out.In bank regulation, too, Americans are taking a more aggressive tack than their European peers. The Fed vice-chair for bank supervision, Michael Barr, has pushed back hard against recent efforts by the global financial lobby to water down Basel III requirements, rejecting the usual bank arguments that holding more capital will mean fewer business loans. He’s also pointed out that the lack of bank failures since the pandemic began has less to do with financial institution strength than government backstopping of the economy.The European parliament, meanwhile, voted in late January to weaken capital rules, which seems to be at least in part a capitulation to the European banking industry’s argument that tougher capital requirements will put them at a disadvantage compared to their larger, more profitable US peers.It’s a story that neither EU nor US financial watchdogs are buying. Moves to make Basel III transitional arrangements permanent “will not defend EU banks against US ones but only protect the vested interests of European megabanks, vis-à-vis their smaller European competitors,” wrote Thierry Philiopponnat, the chief economist of the European non-profit Finance Watch.In fact, says Carter Dougherty, the communications director of Americans for Financial Reform, the EU pushback against capital requirements is its own kind of subsidy. “Europeans have gotten their knickers in a twist over American efforts to address climate change [via the Inflation Reduction Act],” he says, but they don’t seem to realise watering down bank regulation for Europe is essentially a subsidy in itself. Carter fears that reducing bank capital levels “will just lead us down the path of financial instability, bigger paychecks for executives, or worse”.Both the US and the EU have myriad ways of boosting their own companies. But until quite recently, it was assumed that Europe would lead the way in regulating the world’s largest and most powerful corporations. That’s now shifted, perhaps because the more extreme concentrations of corporate power in the US have put the potential dangers, both economic and political, top of mind.As Franklin Delano Roosevelt put it in a 1936 speech, “We stand committed to the proposition that freedom is no half-and-half affair. If the average citizen is guaranteed equal opportunity in the polling place, he must have equal opportunity in the market place.” The new and more robust American regulatory response harks back to an era when power mattered more than price and politicians weren’t afraid to take on big [email protected]

Video: Manufacturing in America, post-globalisation | FT Film More

The Biden administration’s subsidies for companies investing in green technologies could be grabbed by foreign governments under global minimum tax rules, in a “massive” transfer of US tax dollars overseas, a group of multinationals is warning.In summer 2021, 130 of the world’s leading economies signed up to a plan to force multinational companies to pay a global minimum corporate tax rate of at least 15 per cent following negotiations in Paris at the OECD.But the Global Business Alliance, a Washington trade group representing the largest foreign multinationals investing in the US, says its members face “great uncertainty” over how billions of dollars of new US clean energy tax credits will be treated under the terms of the OECD deal. The concern is that US tax credits might reduce a company’s US tax liability to less than the globally agreed 15 per cent, leaving multinational corporations investing in the US open to being taxed by foreign jurisdictions as part of a “top-up tax” mechanism to increase the tax liability to 15 per cent. Although no single country has yet fully implemented the OECD arrangement, the UK, South Korea and Switzerland have already produced draft legislation, while the United Arab Emirates, Australia, Hong Kong, New Zealand and Singapore have launched consultations on the OECD’s rules.“As Europe, Korea and other nations move forward, US companies have been given little guidance and could very soon find that the tax incentives to invest here become little more than a massive US tax transfer to foreign countries,” said Nancy McLernon, head of the Global Business Alliance. A separate Washington-based business group said its member companies were also seeking clarity on the interaction of the OECD rules with the Inflation Reduction Act tax credits. Anne Gordon, vice-president of international tax policy at the National Foreign Trade Council, a US business lobby group, said the group’s member companies were “not comfortable” about the issue, and that guidance from the OECD to date had not “explicitly” addressed US green credits. “Our members are trying to get clarity over how this is going to be treated,” said Gordon. “Some of the ones who are investing large sums of money are very concerned if they make all these investments and do this stuff, and then the credits don’t count or reduce their tax rate, and they get stuck with paying the top-up tax to 15 per cent.” The IRA, Biden’s flagship climate bill, offers close to $370bn in subsidies for clean energy industries aimed at spurring private sector investment and supercharging the country’s decarbonisation efforts. But the law involves novel types of tax credit, giving developers of renewable energy projects the ability to get the value of the tax credits upfront by selling them to third-party investors. It is unclear how these so-called “transferable” tax credits are treated in tax calculations made to work out whether a company is paying its minimum 15 per cent tax. Joshua Odintz from Holland & Knight, a tax practitioner who works on OECD issues, said there was an “open question” over how the tax credits would be viewed by the global minimum tax guidance, meaning some companies receiving them could be seen as paying less than 15 per cent. “Today, we just don’t know how all the IRA tax credits will be treated,” said Odintz. Tax lawyers say the credits offered in the IRA are hybrids of the two most common types of tax credit — refundable and non-refundable. Companies claiming refundable tax credits are eligible to receive the credit as a cash payment even if they have no tax liability in the country, whereas non-refundable credits are available only as a discount to a tax liability. The US Treasury said “several green credits” included in the IRA would be protected according to recently released OECD guidance on “non-controlled partnerships”, while “several” others would be protected by existing guidance. A Treasury official said: “[The] Treasury continues to work through the OECD/G20 Inclusive Framework process to provide additional certainty on the treatment of other tax credits.”

Aharon Friedman, a former senior tax counsel to the House of Representatives ways and means committee, said that international disagreements over which tax credits were acceptable and which were not would create maddening complexity for multinationals — and potentially trade wars.“It’s not just a relatively narrow technical question of, does this particular tax credit meet OECD guidelines? It’s more a matter of who has sovereignty to enact tax law,” he said. “The OECD just issued guidance. Is this now international law? In the US, a law has to be passed by Congress and signed by the president or the Treasury has to follow administrative procedure. It can’t just surprise people by issuing guidance and saying this is law.” More