1 Introduction

Notes

1 Introduction

1. ‘Growth’, ‘transitional’, and ‘converting’ markets have become alternative terms to denominate the concept. What characterizes all these economies is that they have fallen back at some point in history relative to those countries we now call developed. Historically, the term was coined by A. van Agtmael during his term at the International Finance Corporation, the financial arm of the IMF (International Monetary Fund) during the early 1980s. See: A. van Agtmael (2007), The Emerging Markets Century: How a Breed of World- Class Companies Is Overtaken the World, Free City Press, London. 2. With most of them in the 16– 40 age group. 3. Foreign- owned firms behave differently than domestic firms, as they are prone to different dynamics; see for example: J. Merikyll and T. Ro˝o˝m (2014), Are Foreign- Owned Firms Different? Comparison of Employment Volatility and Elasticity of Labor Demand, ECB Working Paper Series, Nr. 1704. So it has also become clear that the structure of the domestic banking system matters for the effectiveness of macroprudential policies (MPPs). More specifically, it has been observed that a high share of non- resident bank loans in an MPP- implementing country reduces the domestic effectiveness of most MPPs; see J. Beirne and C. Friedrich (2014), Capital Flows and Macro- Prudential Policies – A multilateral Assessment of Effectiveness and Externalities, ECB Working Paper Series, Nr. 1721. 4. Despite the evidence, what government spending can do to regain competitiveness and restore external imbalances is described in D. Clancy, P. Jacquinot and M. Lozej (2014), The Effects of Government Spending in a Small Open Economy within a Monetary Union, ECB Working Paper Series, Nr. 1727. 5. B. R. Scott (2007), The Political Economy of Capitalism, Harvard Business School Working Paper, Nr. 07- 037, p. 2. 6. A. Korinek and J. Kreamer (2013), The Redistributive Effects of Financial Deregulation: Wall Street Versus Main Street, IMF Working Paper, WP/13/247. Updated version September 2014 as BIS Working Paper Nr. 468. 7. See J. Meek (2014), Private Island: Why Britain Now Belongs to Someone Else, Verso, London. 8. The FI (Financial Institutions) sector has on a number of occasions been severely impacted by bad governance, to the extent that the need was developed to improve bank governance (see BIS (2014), Corporate Governance Principles for Banks – Consultative Document). 9. See M. J. Sandel (2012), What Money Can’t Buy: The Moral Limits of the Market, Farrar, Straus & Giroux, New York, in particular pp. 91– 128. 10. J. Vogl (2014), The Spectre of Capital, Stanford University Press, Palo Alto CA. 11. Whereby the government insures the repayment to deposit holders of deposits at the bank when impacted by investment decision made by the bank, as the deposits are an integrated part of their funding base. 12. Even for those who were once hardline free market advocates: see P. de Grauwe (2014), De limieten van de markt: de slinger tussen overhead en kapitalisme, Lannoo,

347 348 Notes

Tielt versus P. de Grauwe (1986), De zichtbare hand, Het conflict tussen economie en politiek, Lannoo, Tielt. 13. The relationship can be seen as a ‘condition- process’ whereby globality is a condition for the process to emerge and unfold (globalization). 14. The term was coined by Daniel Yergin in a 1988 (May 18) Newsweek article ‘The Age of Globality’ as well as his co- authored book: D. Yergin & J. Stanislaw (1998), The Commanding Heights: The Battle for the World Economy, Free Press, New York, although its semantic origins go back as far as 1942, as described in: William Safire (2004), No Uncertain Terms: More Writing from the Popular ‘On Language’ Column in The New York Times Magazine, Simon and Schuster, New York, pp. 23– 43. 15. Discussions on this matter are often based on the strengths represented by oppos- ing political parties and are often very primitive content- wise. 16. See W. Streeck (2013), Politics in the Age of Austerity, Polity, New York, in particular Chapter 2: ‘Public Finance and the Decline of State Capacity in Democratic Capitalism’, pp. 26– 58. 17. T. Piketty has drawn quite some attention in recent times (Chapter 4), but also many others have been instrumental in modeling the rising inequality in Western nations; see for example: G. Zucman (2014), Taxing across Borders. Tracking Personal Wealth and Corporate Profits, London School of Economics Working Paper, August. 18. Where that capital would be withdrawn from the public market or only re- injected as debt and not as risk capital, that would facilitate growth and ultimately prosperity. Debt financing also has that potential, but it is very limited (also limited in time) as the actual operational and financial risks are with the borrower (asset owner). 19. My shallow assessment is that it by and large will. See conclusions, endnote 67 of chapter 7. 20. See in extenso: C. Peters (2014), On the Legitimacy of International Tax Law, IBFD Doctoral Series Nr. 31, IBFD, Amsterdam. 21. D. Akyel (2014), Ökonomisierung und moralischer Wandel: Die Ausweitung von Marktbeziehungen als Prozess der moralischen Bewertung von Gütern. MPIfG Discussion Paper 14/13; R. Mayntz (2014), Mayntz, Markt oder Staat? Kooperationsprobleme in der Europäischen Union, Leviathan Vol. 42, Issue 2, pp. 292– 304. 22. See T. Paster (2014), Why Did Austrian Business Oppose Welfare Cuts? How the Organization of Interests Shapes Business Attitudes Toward Social Partnership, Comparative Political Studies, Vol. 47, Nr. 7, pp. 966– 992. 23. For detailed coverage see the DHL connectivity study (2012) at www.dhl.com. 24. Nine of the first ten countries on the index are European. The 2014 KOF globalization index produced annually by the Swiss Federal Technical Institute EPFZ ranks 18 of the first 20 on the list as being European countries. 25. See L. Nijs (2011), Shaping Tomorrow’s Marketplace: Investment Strategies for Emerging Markets and a Semi- Globalized World, Euromoney Books, London, as well as P. Ghemawat (2007), Redefining Global Strategy. Crossing Borders in a World Where Differences Still Matter, Harvard Business School Press, Cambridge MA. 26. T. Jenkins (2011), Prosperity without Growth. Economics for a Finite Planet, Routledge, London, pp. 25– 56, passim. 27. The other trend is the impact of mass- media which will be considered out of scope for this study. See extensively W. Schinkel (2012), De nieuwe democratie. Naar andere vormen van politiek, De Bezige Bij, Amsterdam. Notes 349

2 Liberalism versus Neo- Neoliberalism

1. F. Fukuyama, (1992), The End of History and the Last Man, Free Press, New York. 2. S. Young, (2002), Beyond Rawls: An Analysis of the Concept of Political Liberalism, University Press of America, Lanham, p. 24. 3. Ibid., p. 25. 4. Marcus Aurelius was fostering ‘the idea of a polity administered with regard to equal rights and equal freedom of speech, and the idea of a kingly government which respects most of all the freedom of the governed’. See further: M. A. Antoninus, (2008), The Meditations of Marcus Aurelius Antoninus, Oxford University Press, Oxford, p. 3. 5. E. Bramsted and K. Melhuish (eds), (1978), Western Liberalism: A History in Documents from Locke to Groce, Longman, London. 6. A. Gould, (1999), Origins of Liberal Dominance, University of Michigan Press, Michigan, p. 3. 7. J. Schell, (2004), The Unconquerable World: Power, Nonviolence, and the Will of the People, Macmillan, Basingstoke, p. 266. 8. P. Manent, (1995), An Intellectual History of Liberalism, Princeton University Press, Princeton, p. xv as well as M. Freeden, (1996), Ideologies and Political Theory: A Conceptual Approach, Clarendon Press, Oxford, pp. 137– 140. 9. A. Moravcsik, (2010), Liberal Theories of World Politics, A Primer, Princeton University Working Paper, pp. 5– 9. 10. J. Gray, (1995), Liberalism, University of Minnesota Press, 2nd Ed., Minneapolis, pp. xi– xiii. See also in detail: J. Gray, (2002), Two Faces of Liberalism, The New Press [2000], New York; J. Gray, (2013), Liberalisms: Essays in Political Philosophy, Routledge [1989], London and J. Gray, (2014), Post-Neoliberalism, Studies in Political Thought, Routledge, London. 11. D. Manning, (1976), Liberalism, J. M. Dent & Sons, London, pp. 57– 80. 12. Ibid., endnote 7 as well as J. Powell, (2000), The Triumph of Liberty, Free Press, New York, pp. 45– 89, passim. 13. F. Hayek, (1993), The Constitution of Liberty, Routledge [1960], London, pp. 11– 21; J. Mill, (1989), On Liberty and Other Writings, Stefan Collini (ed.), Cambridge University Press [1859], Cambridge, p. 13; A. Kinneging, (1988), Liberalisme: Een speurtocht naar de grondslagen, Prof. Mr. B. M. Teldersstichting, Den Haag, pp. 8– 16. 14. J. Gray, (2000), Two Faces of Liberalism, Polity Press, Cambridge, pp. 1– 33; D. Rasmussen and D. Den Uyl, (1998), Liberalism Defended. The Challenge of Post- Modernity, The Shaftesbury Papers Nr. 9, Edward Elgar Publishing, Cheltenham & Northampton, p. 6. 15. See in detail: C. Wolfe, (2009), Natural Law Liberalism, Cambridge University Press, Cambridge, pp. 34– 65, passim. 16. L. Strauss, (1968), ‘Natural Law’ in International Encyclopedia of the Social Sciences, MacMillan, Basingstoke, p. 48. 17. See in detail, T. Hobbes, (2013), Leviathan, Renaissance Books [1651], Ontario, passim. 18. A. Lisska, (1998), Aquinas’s Theory of Natural Law: An Analytic Reconstruction, Oxford University Press, Oxford, Chapter 9. 19. See particularly his J. Locke, ‘Two Treatises on Government’, (2013), CreateSpace Independent Publishing Platform, [1689], pp. 14– 23, 56– 89, passim. 20. P. Jones, (1994), Rights, Palgrave Macmillan, Basingstoke, p. 73. 21. E. van de Haar, (2011), Bemind maar onbekend. De politieke filosofie van het liberalisme, Aspekt, Soesterberg, p. 24. 350 Notes

22. R. Dahrendorf, (1987), Fragmente eines neues Liberalismus, Deutsche Verlags- Anstalt, Stuttgart, pp. 45– 87, passim. 23. J. Hampton, (1997), Political Philosophies and Political Ideologies, Westview Press, Boulder, p. xiii. 24. E. Kennedy, (1979), ‘Ideology’ from Destutt De Tracy to Marx, Journal of the History of Ideas, Vol. 40, Issue 3, pp. 353– 368; T. Eagleton, (1991), Ideology: An Introduction, Verso, London, p. 2. 25. A. Heywood, (2012), Political Ideologies: An Introduction, 5th Ed., Palgrave MacMillan, Basingstoke, pp. 75– 86. 26. Ibid., p. 6. For example: • A political belief system • An action- orientated set of political ideas • The ideas of the ruling class • The world- view of a particular social class or social group • Political ideas that embody or articulate class or social interest • Ideas that propagate false consciousness amongst the exploited or oppressed • Ideas that situate the individual within a social context and generate a sense of collective belonging • An officially sanctioned set of ideas used to legitimize a political system or regime • An all- embracing political doctrine that claims a monopoly of truth • An abstract and highly systematic set of political ideas. 27. A. Vincent, (2004), The Nature of Political Theory, Oxford University Press, Oxford, pp. 3– 5. 28. See M. Freeden, (1998), Ideologies and Political Theory: A Conceptual Approach, Oxford University Press, Oxford, pp. 21– 34, passim. 29. B. Norman, (2000), An Introduction to Modern Political Theory, 4th Ed., Palgrave Macmillan, Basingstoke, pp. 4, 10– 12, 23– 26, passim; G. Schaal and F. Heidenreich, (2014), Introduction to Modern Political Theory, Barbara Budrich Publishers, Leverkusen, pp. 67– 78. 30. D. Boucher and P. Kelly, (2009), Introduction, in D. Boucher and P. Kelly (eds.), Political Thinkers: From Socrates to the Present, 2nd Ed., Oxford University Press, Oxford, pp. 1– 20. 31. Those ten themes are: (1) Liberty, (2) Individualism, (3) Skepticism about power, (4) Rule of Law, (5) Civil society, (6) Spontaneous order, (7) Free markets, (8) Toleration, (9) Peace, and (10) Limited government. 32. Fueled by thinkers, some of whom were economists, such as Adam Smith, John Locke, Thomas Malthus, and David Ricardo. 33. A. Peacock and H. Willgeroth, (1989), Overall View of the German Liberal Movement in German Neo- Liberals and the Social Market Economy, in A. Peacock and H. Willgeroth (eds), MacMillan, London, pp. 1– 15. 34. T. Boas and J. Gans- Morse, (2009), Neoliberalism: From New Liberal Philosophy to Anti- Liberal Slogan, Studies in Comparative International Development, Vol. 44, Issue 2, pp. 137– 161. 35. Led by Walter Eucken. 36. Use the law to enshrine the free market as a constitutional and legal principle; see also E. Megay, (1970), Anti- Pluralist Liberalism: The German Neoliberals, Political Science Quarterly, Vol. 85, Issue 3, pp. 422– 442; V. Massimiliano, (2010), The Ordoliberal Notion of Market Power: An Institutionalist Reassessment, European Competition Journal, Vol. 6, Issue 3, pp. 689– 707. Notes 351

37. W. Davies and T. Mills, (2014), Beyond the Laws of the Market, August 28, via newleftproject.org. 38. S. Padgett, (2003), Political Economy: The German Model Under Stress, in S. Padgett, W. E. Paterson, and G. Smith (eds.), Developments in German Politics, Duke University Press, Durham, NC, pp. 126– 127. 39. Academically, the liberal program was distributed and substantiated through different schools which each had their own viewpoints developed over time. The Chicago School has been the most visible. They will further be detailed in Section 2.3. 40. ‘whatever seems to produce the best measurable outcomes is best, regardless of how it comes about, or who does it. Ultimately what this amounts to is a justification for monopoly capital’; see W. Davies and T. Mills, (2014), Beyond the Laws of the Market, August 28, via newleftproject.org. Competition is now a mandate of the market, not the regulator. 41. The regulator is there to make sure that if anyone is behaving in a domineering fashion they are doing it in a way which is efficient and is producing some kind of measurable economic benefit for someone. See in detail: C. Crouch, (2013), The Strange Non- Death of Neoliberalism, Polity, London, pp. 24– 48. 42. ‘But once the state’s job is measuring outcomes and measuring efficiency, the legitimacy of the state looks very different than it does if its job is seen in a much more normative, legal- constitutional way of imposing a particular market order’; see W. Davies and T. Mills, (2014), Beyond the Laws of the Market, August 28, via newleftproject.org. 43. Richard Posner is probably the best example. In the 1990s it started to impact the EU Commission and the ECJ (see elsewhere in this section). 44. Davies and Mills illustrate: ‘Gary Becker (Chicago School economist) famously argues, for example, that there is an optimal amount of crime in a society and whilst you could reduce all muggings to zero, it would cost so much in policing and so on that it probably wouldn’t be worth it, and it would be better for people to take out possessions insurance, for example. So he doesn’t make any argument about the rights of the criminal or the victim, or the limits of a liberal state. He doesn’t make any normative arguments about what kind of society we would like to live in. All he’s arguing is that we want to live in a society that is run efficiently, and that society probably has a little bit of crime’; see W. Davies and T. Mills, (2014), Beyond the Laws of the Market, August 28, via newleftproject.org. 45. Fukuyama, (1992), The End of History and the Last Man, Free Press, New York. 46. The concept was initially was coined by Isaiah Berlin, (1969), Four Essays on Liberty, Oxford University Press, Oxford. See Section 3.2.2.1. 47. Detailed further in Chapter 3. 48. John Stuart Mill was the first to articulate that principle in his ‘On Liberty’ (1859), where he noted: ‘The object of this essay is to assert one very simple principle, as entitled to govern absolutely the dealings of society with the individual in the way of compulsion and control, whether the means used be physical force in the form of legal penalties, or the moral coercion of public opinion. That principle is, that the sole end for which mankind are warranted, individually or collectively in interfering with the liberty of action of any of their number, is self-protection. That the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant. He cannot rightfully be compelled to do or forbear because it will be better for him to do so, because it will make him happier, because, in the opinions of others, 352 Notes

to do so would be wise, or even right. These are good reasons for remonstrating with him, or reasoning with him, or persuading him, or entreating him, but not for compelling him, or visiting him with any evil in case he does otherwise. To justify that, the conduct from which it is desired to deter him must be calculated to produce evil to someone else. The only part of the conduct of any one, for which he is amenable to society, is that which concerns others. In the part which merely concerns himself, his independence is, of right, absolute. Over himself, over his own body and mind, the individual is sovereign’. See: J. S. Mill, (2002), On Liberty, Dover Publications [1859], Mineola, NY, p. 6. 49. J. Gray, (1995), Liberalism, Open University Press, London, pp. 61– 66. 50. At this point liberalism and utilitarianism/consequentialism go their separate ways, as for utilitarianism the (moral justification) of individual freedom is a function of the expected output. What maximizes value, prosperity, and pleasure for as many citizens as possible should be put in action, even if the consequences would be morally unacceptable. Liberalism rejects the calculus mechanism and constructivism of society based on laws and rules (see: T. Fuller, (1987), J. Bentham, J. Mill, L. Strauss, and J. Crospey (eds), History of Political Philosophy, University of Chicago Press, Chicago, pp. 710– 731. Certain liberal thinkers (Hume, Smith, and others) apply the utility concept to conclude that certain persistent ‘mores’ can have value for societies without qualifying them from a principle of moral point of view. 51. A. Ferguson, (1995), An Essay on the History of Civil Society, Fania Oz- Salz- berger (ed.), Cambridge University Press [1767], Cambridge. 52. A. Smith, (1976), An Inquiry Into the Nature and Causes of the Wealth of Nations, R. Campbell and R. Skinner (eds) in two volumes, Liberty Fund, Indianapolis, IN. 53. D. Conway, (1995), Classical Liberalism: The Unvanquished Ideal, Palgrave MacMillan, Basingstoke, pp. 6– 24. 54. N. Scott, (2011), Imposing Values: Liberalism and Regulation, Oxford University Press, Oxford, p. 129. 55. With respect to non- economic spheres the schism between classical and modern liberals still seems in place; see Scott, Ibid., p. 126. Even in a number of economic spheres there seems to be no consensus between both subgroups and on a number of topic there seem to be cross- preferences; see Scott, Ibid., p. 131. 56. F. Hayek, (1980) Studies in Philosophy, Politics and Economics, University of Chicago Press [1967], Chicago, pp. 96– 101; F. Hayek, (1998), Law, Legislation and Liberty: A New Statement of the Principles of Justice and Political Economy, Routledge [1973], New York, Volumes 1 & 2. Hayek follows in the tradition of von Mises in this respect, See L. von Mises, (1996), Human Action, Foundation for Economic Education [1940 German, 1949 English], 4th ed., Irvington- on- Hudson, NY, pp. 13– 14, passim. 57. B. Leoni, (1961), Freedom and the Law, Nash Publishing, online via mises.org, pp. 97– 113. 58. Common law seems to be the most adequate instrument in discovering natural law. See, for a review of a variety of contemporary liberal scholars: J. G. Hülsmann and S. Kinsella (eds.), (2009), Property, Freedom and Society. Essays in Honor of Hans- Hermann Hoppe, L. v. Mises Institute, Auburn, AL, in particular pp. 197– 211. 59. B. Leoni, (1961), Freedom and the Law, Nash Publishing, online via mises.org, pp. 59– 76. 60. Montesquieu is considered the founding father behind the theory. In his ‘L’esprit des Lois’ [1748] he first advocated the separation of powers (trias politica); Notes 353

see C. de S., Baron de Montesquieu, (2011), The Spirit of Laws, Cosimo Classics, New York. 61. R. Epstein, (2003), Skepticism and Freedom: A Modern Case for Classical Liberalism, University of Chicago Press, Chicago, pp. 259– 263. 62. Or even heated debates, as in Hayek being heavily criticized about his list by von Mises, a list that was included in his book The Constitution of Liberty. See A. Hayek, (1993) The Constitution of Liberty, Routledge [1960], New York, pp. 253– 394. 63. Additional arguments are the massive direct and indirect, visible and invisible costs of state government in executing its over- extensive mandates, as well as ensuring that the right incentives and stimuli are provided at the right level, which is at a decentralized and preferably individualized level. 64. R. A. Epstein, (1985), Takings: Private Property and the Power of Eminent Domain, Harvard University Press, Cambridge, MA and later on in R. E. Epstein, (2002), Principles For a Free Society: Reconciling Individual Liberty with the Common Good, Basic Books, New York and most recent in R. E. Epstein, (2011), Design for Liberty: Private Property, Public Administration, and the Rule of Law, Harvard University Press, Cambridge, MA in which he describes the contemporary overregulated state and argues that politicized administrators have too much discretion – a situation that ultimately harms individuals. He goes on to describe how the rule of law can create a more ideal system with limited, neutral public administration combined with robust private property rights and argues fiercely against redistribution. See also: R. E. Epstein, (2013), The Classical Liberal Constitution: The Uncertain Quest for Limited Government, Harvard University Press, Cambridge, MA. 65. From their systemic efforts a number of schools have arisen over time, each with their own characteristics and focal points. The Austrian School focuses on the free market, individual freedom, and entrepreneurship as its core values. The Chicago School in contrast also focuses on economic liberalism and free markets, but also stresses the importance of neo- classical price theory and the development of mathematical models to explain and predict the economy and financial markets, against which the Austrian School clearly objects. The Virginia School focuses more on political economy and the analysis of public and private sector institutions. 66. E. Feulner, (1999), Intellectual Pilgrims. The 50th Anniversary of the Mont Pelerin Society, Mont Pelerin Society, Washington, DC, pp. 23– 38, passim; R. Hartwell, (1995), A History of the Mont Pelerin Society, Liberty Fund, Indianapolis, pp. 20– 35. 67. R. van Zijp, (2004), Oostenrijkse School, in Markt Meesters – Portretten van vooraan- staande liberale economen, M. van de Veld (ed.), Boom/Telderstichting, Amsterdam, pp. 114– 140. 68. R. Cuperus, (2009), De wereldburger bestaat niet, Bert Bakker, Amsterdam, pp. 34– 54, 67– 84, passim. 69. As was the case under ‘socialism’. Von Mises clearly set the tone in 1920 in his paper: L. von Mises, (1935), Economic Calculation in the Socialist Commonwealth, in Friedrich Hayek (ed.), Reprinted in Collectivist Economic Planning: Critical Studies on the Possibilities of Socialism [1920], Routledge and Sons, London, pp. 87– 130 and also L. von Mises, (1981), Socialism: An Economic and Sociological Analysis, Liberty Fund [1922], Indianapolis. von Mises was also a strong advocate of laissez- faire; he suggested the government would not interfere in any way in the economy, although he made a few notable exceptions e.g. development of a military. His position- taking became more strident after Keynesianism took over economic 354 Notes

thinking from 1930– 1960 and the Second World War. His positions were often near acerbic, in particular in his position on the state; see L. von Mises, (1985), Omnipotent Government: The Rise of the Total State and Total War [1944], Reprint, Libertarian Press, Springs Mill, Penn. That strident tone can also be found back in his magnum opus: L. von Mises, (1996), Human Action, 4th Ed., Foundation for Economic Education [1940 German, 1949 English], Irvington- on- Hudson, NY. The liberal framework for society he set out in L. von Mises, (1985), Liberalism: In the Classical Tradition, 3rd Ed., The Foundation for Economic Education [1927], Irvington- on- Hudson, NY. 70. L. von Mises, (1996), Human Action, 4th Ed., Foundation for Economic Education [1940 German, 1949 English], Irvington- on- Hudson, NY, pp. 143– 176, 194– 199, 257– 326, passim. 71. D. Manning, (1976), Liberalism, J. M. Dent & Sons, London, pp. 94– 96. 72. J. Robson, (1998), Civilisation and Culture as Moral Concepts, in J. Skorupski (ed.), The Cambridge Companion to Mill, Cambridge University Press, Cambridge, pp. 338– 371. 73. J. Mill, (1989), On Liberty and Other Writings, Stefan Collini (ed.), Cambridge University Press [1859], Cambridge, pp. 58– 60. 74. L. von Mises, (1985), Liberalism: In the Classical Tradition, 3rd Ed., The Foundation for Economic Education [1927], Irvington- on- Hudson, NY, p. 195. 75. R. Martin and T. H. Green, (2001), Individual Rights and the Common Good in A. Simhony and D. Weinstein (eds), The New Liberalism: Reconciling Liberty and Community, Cambridge University Press, Cambridge, pp. 49– 68; M. Freeden, (1978), The New Liberalism: An Ideology of Social Reform, Clarendon Press, Oxford, pp. 178– 189; L. Hobhouse, (1930), Liberalism, Williams & Norgate [1911], London/Edinburgh, pp. 120– 125; J. Hobson, (2012), The Crisis of Liberalism: New Issues of Democracy, Forgotten Books [1909], London. 76. T. Mackay (ed.), (1981), A Plea for Liberty: An Argument Against Social and Socialist Legislation, Liberty Fund [1891], Indianapolis, pp. 45– 76. 77. M. Freeden, (1986), Liberalism Divided: A Study in British Political Thought 1914– 1939, Oxford University Press, Oxford, pp. 1– 44, 127– 176, 366– 371. 78. L. von Mises, (1983), Planning For Freedom and Sixteen Other Essays and Addresses, 4th Ed. [1952], Libertarian Press, South Holland, pp. 18– 35 containing his essay ‘Middle- of- the- Road Policy Leads to Socialism’ (1950); L. von Mises, (1981), Socialism: An Economic and Sociological Analysis, Liberty Fund [1922], Indianapolis, pp. 244– 245. 79. F. Hayek, (1996), Individualism and Economic Order, University of Chicago Press, [1940], Chicago, pp. 1– 32; F. Hayek, (2007), The Road to Serfdom. Text and Documents. The Definitive Edition. The Collected Works of F. A. Hayek, Volume II, Bruce Caldwell (ed.), University of Chicago Press [1944], Chicago, pp. 105– 135, 159– 176, passim. 80. J. Rawls, (1999), A Theory of Justice, Revised Ed., Belknap Press, [1971], Cambridge, MA. 81. In ‘Political Liberalism’ he adjusted his original theory based on the critiques following the publication of ‘A Theory of Justice’, see J. Rawls, (1996), Political Liberalism, Colombia University Press, New York. 82. J. Paul, (1984), Rawls on Liberty, in Z. Pelczynski and J. Gray (eds.), Conceptions of Liberty in Political Philosophy, The Athlone Press, London, pp. 376– 396. 83. F. Hayek, (1991), The Fatal Conceit: The Errors of Socialism, The Collected Works of F. A. Hayek, Volume I, W. W. Bartley (ed.), University of Chicago Press, Chicago, pp. 114– 119 and M. Friedman, (2002), Capitalism & Freedom, University of Chicago Press, Chicago, pp. 161– 195. Notes 355

84. B. David (ed.), (1998), The Libertarian Reader, The Free Press, New York, p. xii; Etienne de la Boétie, (2013), Discours de la servitude volontaire, J’ai Lu [1549] (translated edition: The Politics of Obedience: The Discourse of Voluntary Servitude, Black Rose Books, Montreal, 1997). 85. F. Fukuyama, (2011), The Origins of Political Order: From pre- Human Times to the French Revolution, Farrar, Straus & Giroux, pp. 34– 56, 78– 90, passim. 86. Libertarianism, as an ideology, is a trend that is most visible in the US, popular- ized in present times by the works of Ron Paul. See: R. Paul, (2011), Defining Freedom: Fifty Issues that Affect our Freedom, Grand Central Publishing, New York, in which he describes liberty as: ‘liberty is not to believe in any particular social and economic outcome. It is to trust in the spontaneous order that emerges when the state does not intervene in human volition and human cooperation. It permits people to work out their problems for themselves, build lives for themselves, take risks and accept responsibility for the results, and make their own decisions.’ See further: R. Paul, (2009), The Revolution: A Manifesto, Grand Central Publishing, New York and in particular his fight against the incumbent financial infrastructure: R. Paul, (2009), End the FED, Grand Central Publishing, New York. More generally: J. Brennan, (2012), Libertarianism: What Everybody Needs to Know, Oxford University Press, Oxford. 87. R. Nozick, (2013), Anarchy, State, and Utopia, 2nd Ed., Basic Books [1974], 2nd Ed., New York. 88. His thinking knows contemporary reflection through the works of Jan Narveson and David Friedman, son of Milton Friedman. 89. H. Spencer, (1978), The Principles in Ethics in Two Volumes, Liberty Fund, Indianapolis, pp. 23– 30; R. Hofstadter, (1955), Social Darwinism in American Thought, Beacon Press, Boston, MA, pp. 31– 50. 90. H. Spencer, (1982), The Man Versus the State. With Six Essays on Government, Society and Freedom, Liberty Fund, Indianapolis, pp. 5– 70, 123– 166, 261– 263. 91. R. Hofstadter, (1955), Social Darwinism in American Thought, Beacon Press, Boston, MA, pp. 51– 66; W. Sumner, (1918), The Forgotten Man, Yale University Press [1876], New Haven, London p. 43, online via libertyfund.org. 92. That echoes some resemblance with modern- day discussions about foreign intervention by states via development aid, an over- general and unconditional distribution of welfare benefits, and large infrastructure projects such as the football World Cup and Olympics facilities. 93. A. Nock, (1928), On Doing the Right Thing and Other Essays, Harper and Brothers, London and New York, pp. 161– 178, online via mises.org. 94. Even more: regulatory intervention after events tends to happen in the heat of the moment with little thought and instead tries to fight the symptoms of the problem rather than diagnose and cure the underlying issues. A good example is the Sarbanes- Oxley legislation that was introduced after the failure of Enron/ Worldcom in 2001– 2002. Efficiency and adequacy of government intervention will be analyzed further in Chapters 3 and 4. 95. Which social standards are authoritative? Despite the central claim of legal positivism that legal validity depends on sources, legal positivism does not claim that the laws so identified should be followed or obeyed or that there is value in having clear, identifiable rules. 96. Remarkably enough the same can be argued for negative freedom, as that also needs to be secured by the state. 97. G. Duncan and T. Machan, (2005), Libertarianism: For and Against, Rowman & Littlefield, Lanham, MD, pp. 20– 29. 356 Notes

98. R. Nozick, (2013), Anarchy, State, and Utopia, Basic Books [1974], 2nd Ed., New York. 99. M. Rothbard, (1998), The Moral Status of Relations to the State, Chapter 24 of The Ethics of Liberty, Humanities Press [1982], New York University Press, New York, pp. 183– 188. 100. We also find that line of thinking with Hayek/von Mises (Section 2.1.3). 101. A lot of work in this area has been done by Frans de Waal et al. Most of the findings followed the initial publication of his paper F. de Waal and S. Preston, (2002), Empathy: Its Ultimate and Proximate Bases, Behavioral and Brain Sciences, Vol. 25, pp. 1– 72. 102. R. Long and T. Machan (ed.), (2008), Anarchism/Minarchism: Is a Government Part of a Free Country?, Ashgate, Farnham, pp. 34– 51; D. Gordon, (2007), The Essential Rothbard, Ludwig von Mises Institute, Auburn, AL, pp. 87– 94, 110– 113; J. Narveson, (2008), You and the State: A Fairly Brief Introduction to Political Philosophy, Rowman & Littlefield, Lanham, MD, pp. 54– 80; W. Block, (2008), Defending the Undefendable: The Pimp, Prostitute, Scab, Slumlord, Libeler, Moneylender and Other Scapegoats in the Rogue’s Gallery of American Society, Ludwig von Mises Institute [1976], Auburn AL, pp. 97– 137; M. Rothbard, (2004), Man, Economy and State: With Power and Market, Ludwig von Mises Institute, Auburn, AL, pp. 79– 188, 875– 1041. 103. R. Long, (1998), Towards a Libertarian Theory of Class, Social Philosophy and Policy, Vol. 15, Issue 2, pp. 303– 349, in particular p. 304. 104. W. Block, (2005), Governmental Inevitability: Reply to Holcombe, Journal of Libertarian Studies, Vol. 19, Issue 3, pp. 71– 93. 105. Rothbard avoids the minimal state concept suggesting a ‘private protection agency’ in his book M. Rothbard, (2002), For a New Liberty: A Libertarian Manifesto, Collier Macmillan Books [1973], London, pp. 93– 118. See also in D. Friedman, (2014), The Machinery of Freedom: Guide to a Radical Capitalism, 3rd Ed., Chu Hartling LLC, New York. 106. See M. Friedman, (2012), Nozick’s Libertarian Project: An Elaboration and Defense, Bloomsbury Academic, London, p. 96. Referring to the position ‘that if the benefits and burdens of cooperating with the state in a program necessary to secure our rational agency are fairly distributed, then all rational agents are morally obligated to participate. Most basically, with respect to those functions of the state that establish the preconditions for the exercise of our moral agency, it is simply unfair for some members of a community to reap the benefits of the efforts of others while refusing to contribute themselves’; See E. Mack, (2012), Nozickian Arguments for the More- Than- Minimal State, in R. Bader and J. Meadowcroft (eds), The Cambridge Companion to Nozick’s Anarchy, State, and Utopia, Cambridge University Press, Cambridge, pp. 89– 115 (also via Friedman’s website: www.natu- ralrightslibertarian.com). Mack identifies the essential difficulty with permitting the independent enforcement of justice as the possibility that: ‘so many potential purchasers of protective services may seek to free ride on others’ voluntary funding of those services … that those services will not get funded (or will be dramati- cally under- funded)’ (p. 104). Mack further notes that one way that Nozick might address this possibility, consistent with his core values, is to invoke what he terms the ‘anti- paralysis’ postulate, i.e. ‘when working out the detailed specification of a person’s rights, one is to avoid specifications that systematically morally preclude individuals from exercising their rights or from conducting their lives in ways that the specification of their rights is supposed to protect’ (p. 112). Notes 357

107. Mack, Ibid., p. 113. 108. Mack, Ibid., p. 110. 109. J. Hueber, (2010), Liberalism Today, Praeger, Greenwood Publishing Group, Westport, CT, pp. 51– 55. 110. For a comprehensive analysis of Nozick’s arguments applied to liberal democracies see: D. Friedman, (2014), Libertarian Philosophy in the Real World: The Politics of Natural Rights, Bloomsbury Academic, London. 111. Her first work that pointed in that direction was A. Rand, (1964), The Virtue of Selfishness, Centennial Edition, Signet, New York. Rand argued in The Virtue of Selfishness, her nonfiction work on moral philosophy, that (i) one’s own life is logically the ultimate value because it makes all other values possible; that (ii) it is therefore irrational for a valuing being not to defend and further this life above all other values; and that (iii) this entails strong conclusions about the rightness – actually, the moral necessity – of living selfishly. More broadly, a central theme in her work is the proposition that a particular conception of the good life is itself a moral value, and that from this value, certain libertarian moral and political conclusions follow. 112. See endnote 111 for Rand’s position. For Nozick’s position see: R. Nozick, (1997), Socratic Puzzles, Harvard University Press, Cambridge, MA, pp. 249– 265. Many of Rand’s moral arguments have the flaw that they purport to deduce that a rational being must behave in a certain way to have a good life, but all the conclusions about morality are smuggled in through a morally loaded definition of rationality, or of human nature. 113. C. Kukathas and Ayn Rand, Routledge Encyclopedia of Philosophy, online, Routledge. 114. D. Den Uyl and D. Rasmussen, (1984), Capitalism in the Philosophical Thought of Ayn Rand, in D. Den Uyl and D. Rasmussen (eds.), The Philosophical Thought of Ayn Rand, University of Illinois Press, Illinois, pp. 169– 180. 115. Marian Sawer, (2003), The Ethical State: Social Liberalism in Australia, Melbourne University Publishing, Melbourne, p. 87. 116. See for example R. Ebeling and J. Hornbergern (eds), (1995), The Case for Free Trade and Open Immigration, The Future of Freedom Foundation, Fairfax. 117. Susan Haslip, (2003), Aristotle’s Theory of the Good Life: A Consideration of the Role of Luck in the Good Life and the Concept of Self- Sufficiency, Quodlibet Journal, Vol. 5, Issue 1, pp. 1– 14. 118. O. Hartwich, (2009), Neo-Liberalism: The Genesis of a Political Swearword, The Center for Independent Studies, St. Leonards, p. 28. 119. T. Boas and J. Gans- Morse, (2009), Neoliberalism: From New Liberal Philosophy to Anti- Liberal Slogan, Studies in Comparative International Development, Vol. 44, Issue 2, pp. 137– 161. They point to 148 different definitions or interpretations. Neoliberalism is almost never defined, but is used in several senses to describe ideology, economic theory, development theory, or economic reform policy. See also for a more recent bibliographical review: W. Davies, (2014), Neoliberalism: A Bibliographical Review, Theory, Culture and Society, Vol. 31, Issue 7– 8, pp. 309– 317. 120. For the demarcation lines between the different schools see endnote 65. For a deeper analysis of their role in marketing neoliberal thought see D. Jones, (2014), Masters of the Universe: Hayek, Friedman and the Birth of Neoliberal Politics, Princeton University Press, Princeton, NJ, Chapters 6 and 7. 121. E. van de Haar, (2012), Bemind Maar Onbekend: De Politieke Filosofie van het Liberalisme, Aspekt, Soesterberg, p. 23. That is a challenging choice. The term 358 Notes

paleo- liberalism itself is used in at least a number of different contexts and often refers to extreme forms of liberalism. Alternatively it is used to describe those liberals who are more ‘libertarian’ or ‘socialist’ in political outlook, some of whom even oppose neoliberalism; see: M. Lind, (2004), A Tragedy of Errors: The Neoconservatives’ War has proven a Disaster, February 24, www.salon.com; see also G. Nash, (1991), A Cold War Neoliberal, New York Times, November 10, p. BR26. 122. Named after Walter Lippmann, whose book and message in ‘The Good Society’ was the cornerstone for the gathering. See: W. Lippmann, (2004), The Good Society, Transaction Publishers [1937], Piscataway, New Jersey. The Good Society falls naturally apart into two segments. In the first, Lippmann shows the errors and common fallacies of faith in government as the solution to all problems. In the second part of the book, Lippmann offers reasons why liberalism lost sight of its purpose and suggests the first principles on which it can flourish again. He did not write ‘The Good Society’ to please adherents of any political ideology. Lippmann challenges all philosophies of government, and yet manages to present a positive program. Lippmann argues that liberalism’s revival is inevitable because no other system of government can work, given the kind of economic world mankind seeks. 123. Organized by French philosopher L. Rougier. 124. Rüstow himself could in contemporary terms be coined a German ordoliberal. See: H. Oliver Jr., (1960), German Neoliberalism, Quarterly Journal of Economics, Vol. 74, Issue 1, pp. 117– 149. Rüstow used the term paleo- liberal for authors such as von Mises and Hayek. Different trains of thought between those two groups caused a schism within the early group of economists at the Lippmann colloquium. The schism between ordo- and neoliberalism often boils down to the role of the state. Where neoliberalism wants to minimize the role of the state (although that is not true in every meaning of the word), ordoliberalism sees a strong role for the government in ensuring that the free market functions properly and stays close to some notion of ideal (or optimal) market. The role of the state further includes taming powerful private interests, leading to strong competition laws. They considered this important, bearing in mind that large cartels in the late 19th century German economy stifled true competition. See in detail: G. Schnyder and M. Siems, (2013), The Ordoliberal Variety of Neoliberalism, in S. Konzelmann and M. Fovargue- Davies (eds), Banking Systems in the Crisis: The Faces of Liberal Capitalism, Routledge, Abingdon [2012], pp. 250– 268. 125. O. Hartwich, (2009), Neoliberalism: The Genesis of a Political Swearword, Centre for Independent Studies, St. Leonards, pp. 18– 19. 126. The stand- off was between Von Mises and Hayek versus pretty much all the others, who included Louis Rougier, Walter Lippmann, Alexander Rüstow, and Wilhelm Röpke. 127. O. Hartwich, (2009), Neoliberalism: The Genesis of a Political Swearword, Centre for Independent Studies, St. Leonards, pp. 18– 19. For an excellent overview of the historical dynamics of Ordoliberalism and its impact on the design of legislation, see: D. J. Gerber, (1994), Constitutionalizing the Economy: German Neoliberalism, Competition Law and the ‘New’ Europe, American Journal of Comparative Law, Vol. 42, pp. 25– 84. See also C. Peters, (2014), On the Legitimacy of International Tax Law, IBFD Doctoral Series Nr. 31, Amsterdam, pp. 44– 46, passim. 128. Boas and Gans- Morse, (2009), Neoliberalism: From New Liberal Philosophy to Anti- Liberal Slogan, Studies in Comparative International Development, Vol. 44, Issue 2, pp. 137– 161. Notes 359

129. P. Mirowski and D. Plehwe, (2009), The Road from Mont Pelerin: The Making of the Neoliberal Thought Collective, Harvard University Press, Cambridge, MA, pp. 13– 14. 130. Ibid., Boas and Gans- Morse, p. 143. All of the criteria later come back in the conditions of the Washington consensus that developed and allowed neoliberalism to become a global phenomenon, founding the IMF, World Bank, and other international institutions to advocate its underlying principles in return of financial support from the international community for emerging economies or developing nations. 131. Fredrick Hayek, (2006), The Constitution of Liberty, Routledge [1960], London; D. Harvey, (2005), A Brief History of Neo- liberalism, Oxford University Press, Oxford, pp. 5– 39; R. McChesney, (1999), Noam Chomsky and the Struggle Against Neo- liberalism, Monthly Review online via DOI: http://dx.doi. org/10.14452/ MR- 050- 11- 1999- 04_4. 132. Hayek, (2006), The Constitution of Liberty, Routledge [1960], London, pp. 3– 9. 133. Ibid., p. 11. 134. Ibid., p. 19. 135. Ibid., p. 71. 136. E. Miller, (2010), Hayek’s The Constitution of Liberty: An Account of its Arguments, The Institute of Economic Affairs, London, p. 42; R. Hamowy, (1978), Law and the Liberal Society: F. A. Hayek’s Constitution of Liberty, Journal of Libertarian Studies, Vol. 2, Issue 4, pp. 287– 291. The latter includes material critique of the definitions used by both Hayek and Berlin in terms of ‘negative freedom’ and ‘coercion’. 137. F. Hayek, (2006), The Constitution of Liberty, Routledge [1960], London, p. 60. 138. Ibid., p. 21, but adds ‘if people are to be free to choose their associates and intimates, the coercion that arises from voluntary association cannot be the concern of government’ (p. 138). 139. Ibid., p. 60; ‘A society that fails to recognise these principles can have no respect for the dignity of the individual and cannot really know freedom’ (p. 79). Most of Hayek’s ideas reflected in ‘The Constitution of Liberty’ have been further detailed in F. Hayek, (2012), Law, Legislation and Liberty, Routledge [1979], London, and earlier F. A., (1996), Individualism and Economic Order, University of Chicago Press [1949], Chicago. 140. Hayek, (2006), The Constitution of Liberty, Routledge [1960], London, p. 403. He added: ‘democracy is probably the best form of limited government’ or, stated more cautiously, that majority rule is perhaps ‘the least evil of those forms of government from which we have to choose’ (pp. 403/116). 141. Ibid., Chapters 5 and 11. 142. Ibid., p. 215. 143. Ibid., p. 206. 144. Ibid., p. 213. 145. Ibid., p. 231. It also implies ‘that people be told what to do and what ends to serve. The administrative pursuit of distributive justice is incompatible with treating individuals according to general rules’ (pp. 231– 233). He goes on to describe (which evolved later in his life) what role governments should engage in (pp. 234– 239), which includes education up to a minimum standard can be made compulsory. The justification, aside from the contribution to democratic governance, is that ‘all of us will be exposed to less risks and will receive more benefits from our fellows if they share with us certain basic knowledge and beliefs’ (pp. 376– 377). 146. Ibid., pp. 306– 308. He laments regarding the non- generality of the law governing a progressive tax system providing proof in his opinion that the often used ‘ability- to- pay principle’ was superseded by the ‘distribution argument’ (p. 311). 360 Notes

He also partly backtracks on his progressivity taxation- bashing as he endorses lower proportional taxes for the minority weak and some progressivity to offset the regressivity of indirect taxes incurred (pp. 332– 333). 147. See extensively F. Block and M. Somers, (2014), The Power of Market Fundamentalism: Karl Polanyi’s Critique, Harvard University Press, Cambridge, MA. 148. C. Boix, (2010), Redistribution Policies in a Globalized World, in M. Bacchetta and M. Jansen (eds), Making Globalization Socially Sustainable, ILO/WTO, Geneva, pp. 261– 295. See in detail for an overview of the different arguments: M. McCarthy, (2014), Neoliberals Without the Neoliberals, Evidence from the Rise of 401(k) Retirement Plans, MPIfG Discussion Paper 14/12, Max Planck Institute for the Study of Societies, Cologne, pp. 4– 5. 149. A. Callinicos, (2001), Against the Third Way, Polity, Cambridge, pp. 23– 34, 54– 87, passim. 150. B. Amable, (2011), Morals and Politics in the Ideology of Neoliberalism, Socio- Economic Review, Vol. 9, Issue 1, pp. 3– 30. 151. S. Babb, (2009), Behind the Development Banks: Washington Politics, World Poverty, and the Wealth of Nations, University of Chicago Press, Chicago, pp. 67– 87, 102– 111. 152. M. Blythe, (2007), One Ring to Bind Them All: American Power and Neoliberal Capitalism, in J. Kopstein and S. Steinmo (eds.), Growing Apart? America and Europe in the Twenty- First Century, Cambridge University Press, New York, pp. 109– 135. 153. R. Brenner, (2006), The Economics of Global Turbulence, Verso Books, London, pp. 45– 57; G. Duméneil and D. Levy, (2004), Capital Resurgent: Roots of the Neoliberal Revolution, trans. Derek Jeffers, Harvard University Press, Cambridge, MA, pp. 120– 132. 154. A. Glyn, (2006) Capitalism Unleashed, Oxford University Press, Oxford, pp. 87– 89. 155. See for example M. McCarthy, (2014), Neoliberals Without the Neoliberals, Evidence from the Rise of 401(k) Retirement Plans, MPIfG Discussion Paper 14/12, Max Planck Institute for the Study of Societies, Cologne, dealing with the neoliberal (pension marketization) and regulatory aspects of the shift in the 1980s/90s from defined benefits plans to defined contribution plans (401(k)s in the USA). 156. McCarthy, Ibid., p. 5. 157. G. Krippner, (2007), The Making of US Monetary Policy: Central Bank Transparency and the Neoliberal Dilemma, Theory and Society, Vol. 36. Issue 6, pp. 477– 513; A. Major, (2012), Neoliberalism and the New International Financial Architecture, Review of International Political Economy, Vol. 19, Issue 4, pp. 536– 561; L. Panitch and S. Gindin, (2012), The Making of Global Capitalism, Verso Books, London, pp. 134– 156. 158. G. Krippner, (2007), The Making of US Monetary Policy: Central Bank Transparency and the Neoliberal Dilemma, Theory and Society, Vol. 36. Issue 6, pp. 477– 513. 159. M. McCarthy, (2014), Neoliberals Without the Neoliberals, Evidence from the Rise of 401(k) Retirement Plans, MPIfG Discussion Paper 14/12, Max Planck Institute for the Study of Societies, Cologne, p. 5; S. Vogel, (1996), Freer Markets, More Rules: Regulatory Reform in Advanced Industrial Countries, Cornell University Press, Ithaca, pp. 121– 136, 145– 165, passim. Notes 361

160. As eloquently demonstrated in Ph. Mirowski, (2009), Postface; Defining Neoliberalism, in Ph. Mirowski and D. Plehwe (eds.),The Road from Mont Pelerin, Harvard University Press, Cambridge, MA, pp. 417– 455. 161. Hayek’s paper produced after the first few years of the MP society is called ‘The Intellectuals and Socialism’ (1949). 162. D. Jones, (2014), Masters of the Universe: Hayek, Friedman and the Birth of neoliberal Politics, Princeton University Press, Princeton, NJ, p. 4. 163. Jones, Ibid., pp. 6– 10. 164. To which Friedman’s essay ‘Neoliberalism and Its Prospects’ (1951) became instrumental. 165. D. Jones, (2014), Masters of the Universe: Hayek, Friedman and the Birth of neoliberal Politics, Princeton University Press, Princeton, NJ, p. 8. 166. Ibid., p. 11 and detailed in Chapter 3. 167. Ibid., p. 13. 168. Ibid., p. 13; also N. Klein, (2008), The Shock Doctrine: The Role of Disaster Capitalism, Picador, New York. 169. Ph. Mirowski, (2009), Postface; Defining Neoliberalism, in Ph. Mirowski and D. Plehwe (eds.), The Road from Mont Pelerin, Harvard University Press, Cambridge, MA, pp. 417- 455. 170. D. Jones, (2014), Masters of the Universe: Hayek, Friedman and the Birth of neoliberal Politics, Princeton University Press, Princeton, NJ, p. 14. 171. Ibid., p. 15. 172. Ibid., p. 19. 173. J. Peck, (2013), Constructions of Neoliberal Reason, Oxford University Press [2010], Oxford, pp. 1– 54. 174. B. Amable, (2011), Morals and Politics in the Ideology of Neoliberalism, Socio- Economic Review, Vol. 9, Issue 1, pp. 3– 30. 175. M. Cateno and J. Cohen, (2012), The Arc of Neoliberalism, Annual Review of Sociology, Vol. 38, pp. 317– 340; see also: M. McCarthy, (2014), Neoliberals Without the Neoliberals, Evidence from the Rise of 401(k) Retirement Plans, MPIfG Discussion Paper 14/12, Max Planck Institute for the Study of Societies, Cologne, pp. 4– 5. 176. Intellectually borrowed from Habermas; see Chapter 3. 177. See Chapter 3. The neoliberal ideology and the state it produces is ‘inherently penal, developing punitive containment as a governmental technique for managing a variety of mandates’. In this ‘Leviathan’ state, the most ‘socially and economically marginalized classes are controlled through a mixture of prisonfare and workfare. Prisonfare is seen as a system of ‘warehousing’ permanently unemployed sections of society, effectively penalizing poverty; workfare has seen welfare rights become conditional on job- seeking at low wages. Neoliberalism in this context is the reconstruction of all social relations on the model of the entrepreneur responsible for her own fate’. Wacquant views this reconstruction as a process by which the capitalist market establishes a monopoly of democratic coercion or violence within the social sphere, where it translates economic injustices – poverty, inequality, exploitation, unemployment and social exclusion – into social problems which are addressed by police action and penal treatment; see in detail: L. Wacquant, (2009), Punishing the Poor: The Neoliberal Government of Social Security, Duke University Press, Durham, NC. More generally, regarding supervision and repression as ‘passe partout’ for 362 Notes

more and more issues in society: L. Bleri, (2014), De neoliberale strafstaat, Epo, Berchem. 178. Also known as economic imperialism. This methodology comes to a large degree out of the research body of the Chicago School and in particular the works of Gary Becker and Ronald Coase – see for the latter in Chapter 4 about the ‘theory of transaction costs’; see: W. Davies and T. Mills, (2014), Neoliberalism and the End of Politics, Part 1, New Left Project, August 22, Newleftproject.org. 179. The same tools and instruments and theories which were originally developed to enable chief executives of corporations to consider the identity and strategic direction of their firms are expanded for use by politicians and those in the executive branch of government to think about the strategic direction of entire polities; see: W. Davies, (2014), The Limits of Neoliberalism, Authority, Sovereignty and the Logic of Competition, Sage, London, Chapter 2 ‘The Promise and Paradox of Competition: Markets, Competitive Agency and Authority’. See also: A. Dominic, (2014), Ökonomisierung und moralischer Wandel: Die Ausweitung von Marktbeziehungen als Prozess der moralischen Bewertung von Gütern. MPIfG Discussion Paper 14/13, Max- Planck- Institut für Gesellschaftsforschung, Ko˝ln. 180. M. Ho˝pner, (2014), Wie der Europäische Gerichtshof und die Kommission Liberalisierung durchsetzen: Befunde aus der MPIfG- Forschungsgruppe zur Politischen Ökonomie der europäischen Integration. MPIfG Discussion Paper 14/8, Max- Planck- Institut für Gesellschaftsforschung, Ko˝ln. They report an extensive account concluding that ‘judicial integration is being activated either by the integration- friendly Commission or by private actors who use European law as an instrument to enforce their own interests. European judges deciding cases are characterized by an integrationist perception of the aims of European law. Ex- post political correction of ECJ decisions is unlikely, which provides European judges with plenty of room for maneuver. The reasons for this unlike- lihood of correction are associated with the following features: the structure of the EU political system; the politico- economic conflict structure between heterogeneous member states; the Commission’s access to strategies that divide defense coalitions among member states; and the gradual, cumulative process of judicial integration’. 181. W. Davies and T. Mills, (2014), Neoliberalism and the End of Politics, Part 1, New Left Project, August 22, www.newleftproject.org See extensively Section 2.5. 182. W. Davies and T. Mills, (2014), Neoliberalism and the End of Politics, Part 1, New Left Project, August 22, www.newleftproject.org. 183. Ibid. 184. Ibid. 185. And will be extensively covered in Chapter 3. 186. Which supported the US military- industrial complex. As such, the military ‘supervision and control’ dynamics have deep historical roots in the neoliberal program. Also the sovereign itself and its representatives do not escape that gravity, as evidenced during the Petraeus scandal in 2012. 187. S. Amadae, (2003), Rationalizing Capitalist Democracy: The Cold War Origins of Rational Choice Liberalism, University of Chicago Press, Chicago, pp. 45– 89, passim. 188. Implicit in these rational choice models was a view of politics, not as a realm for deliberation and cooperation, but a site of conflicting claims by isolated, Notes 363

calculating actors; see: T. Mills, (2014), Strange Freedom: The Origins of the Neoliberal Leviathan, New Left Review, January 1, via newleftproject.org. 189. James Buchanan, ‘Man and the State,’ MPS Presidential talk, 31 August 1986, cited in Ph. Mirowski, (2013), Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown, Verso, London, p. 41. 190. M. Olssen, (2009), Liberalism, Neoliberalism, Social Democracy: Thin Communitarian Perspectives on Political Philosophy and Education, Routledge, London, p. 17. 191. F. Hayek, (1986), The Moral Imperative of the Market, in M. Anderson (ed.), The Unfinished Agenda: Essays on the Political Economy of Government Policy in Honour of Arthur Seldon, Institute of Economic Affairs, London, pp. 56– 89. 192. T. Mills, (2014), Strange Freedom: The Origins of the Neoliberal Leviathan, New Left Review, January 1, via newleftproject.org. 193. A. Roberts, (2011), The Logic of Discipline: Global Capitalism and the Architecture of Government, Oxford University Press, Oxford, pp. 4 and 6. 194. T. Mills, (2014), Strange Freedom: The Origins of the Neoliberal Leviathan, New Left Review, January 1, via newleftproject.org. He laments that ‘The rise of ‘technocratic government’ in response to the Euro crisis and the increasingly violent repression of political dissent is no aberration. It is the logical endgame of a dark political vision crafted in opposition to democratic advances; the realization of a strange freedom which lies at the root of the neoliberal dystopia, from which the political establishment offers no deliverance’. 195. D. Thorsen and A. Lie, (2010), What is Neoliberalism?, University of Oslo Working Paper. 196. F.A. Hayek, (1982), Law, Legislation and Liberty, Routledge, London, Vol. 2, pp. 108– 109 and F.A. Hayek, (1978), New Studies, Routledge and Keagan Paul, London, pp. 60, 90– 91. 197. D. Harvey, (2007), A Brief History of Neoliberalism, Oxford University Press, Oxford, p. 2. 198. Ibid., p. 2. 199. P. Treanor, (2005), Neoliberalism: Origins, Theory, Definition, http://web.inter. nl.net/users/Paul.Treanor/neoliberalism.html. 200. Ibid. 201. Ibid. 202. D. Harvey, (2007), A Brief History of Neoliberalism, Oxford University Press, Oxford, p. 3. 203. Ibid., pp. 11 and 40. He further highlights: ‘Redistributive politics (including some degree of political integration of working- class trade union power and support for collective bargaining), over the free mobility of capital (some degree of financial repression through capital controls in particular), expanded public expenditures and welfare state- building, active state interventions in the economy, and some degree of planning of development’. 204. Ibid., p. 19. 205. See for extensive coverage 6.9. Ibid., p. 33. 206. Harvey uses the term ‘accumulation of dispossession’, which comprises four main features: (1) privatization and commodification, (2) financialization, (3) management and manipulation of crises (for example financial institutions threatening to reduce the credit supply to society) in case of tighter capital rules), and (4) state redistributions, Ibid., pp. 160– 164. 207. Universities, media, economics, culture, politics, law, and ultimately individual relations between humans. 364 Notes

208. Ibid., pp. 42 and 47. 209. Ibid., pp. 64– 66. 210. Which has received a lot of attention in literature after the 2008 financial crisis, including (and not referred to elsewhere in the text): N. Chomsky and McChesney, (2011), Profits Over People: Neo- Liberalism & Global Order, Seven Stories Press, New York; M. Steger and R. Roy, (2010), Neo-Liberalism: A Very Short Introduction, Oxford University Press, Oxford; G. Duménil and D. Lévy, (2011), The Crisis of Neo- Liberalism, Harvard University Press, Cambridge, MA; H. Giroux, (2008), Against the Terrorism of Neo- Liberalism: Politics Beyond the Age of Greed, Paradigm Publishers, Boulder, CO; D. Loo, (2011), Globalization and the Demolition of Society, Larkmead Press, Glendale, CA; P. Mirowski, (2013), Never Let a Serious Crisis Go to Waste: How Neo- Liberalism Survived the Financial Crisis, Verso, London; J. Taylor, (2013), Negative Capitalism: Cynicism in the Neoliberal Era, John Hunt Publishing, London; D. Hassler- Forest, (2012), Capitalist Superheroes: Caped Crusaders in the Neoliberal Age, John Hunt Publishing, London; D. Harvey, (2011), The Enigma of Capital: And the Crisis of Capitalism, Oxford University Press, Oxford; H. Aidi, (2012), Redeploying the State: Corporatism, Neo- Liberalism and Coalition Politics, Palgrave Macmillan, Basingstoke; B. Tamanaha, (2008), The Dark Side of the Relationship Between the Rule of Law and Liberalism, NYU Journal of Law and Liberty, Vol. 33, St. John’s Legal Studies Research Paper Nr. 08– 0096; B. Harcourt, (2008), Neoliberal Penality: The Birth of Natural Order and the Illusion of Free Markets, University of Chicago Law & Economics, Olin Working Paper Nr. 433, University of Chicago, Public Law Working Paper Nr. 238. 211. D. Harvey, (2011), The Enigma of Capital: And the Crisis of Capitalism, Oxford University Press, Oxford, pp. 79– 80. 212. For example, the family house is a larger component of total wealth for the middle class than the more affluent. The impact of larger mortgages is therefore more significant. 213. J. Galbriath, (2014), The End of Normal: The Great Crisis and the Future of Growth, Simon & Schuster, New York, pp. 23– 32, passim. 214. Stagnation refers to (protracted) periods of time with real growth being less than 2– 3%; See also P. Krugman, (2014), Four Observations on Secular Stagnation, in C. Teulings and R. Baldwin (eds.), Secular Stagnation: Facts, Causes and Cures, CEPR Press, Ebook via Voxeu.org, pp. 61– 68. Secular stagflation further refers to the fact that growth does not seem to consistently pick up despite the extraor- dinary (monetary) policy measures, indicating that low growth will most likely become a structural part of the economic outlook for a protracted period of time. 215. D. Kotz, (2000), Globalization and Neoliberalism, University of Massachusetts, Amherst Working Paper; J. Scholte, (2005), The Sources of Neoliberal Globalization, United Nations Institute for Social Research, UNRISD, Geneva. 216. J. Stiglitz, (2003), Globalization and Its Discontent, W. W. Norton & Company, New York, pp. 34– 54, 67– 98, passim and previously in time under the same title S. Sassen, (1998), Globalization and Its Discontent, New Press, New York. 217. J. Cohen, (2007), The Impact of Neo- Liberalism, Political Institutions and Financial Autonomy on Economic Development, 1980– 2003, Diss., Department of Sociology, Princeton University, unpublished. 218. See Section 2.4 in detail. Notes 365

219. J. Gray, (2010), The Neoliberal State: ‘Neo- liberalism has delivered not a small state, but a bloated market- state in which government interferes’, The New Statesman, January 7, via newstatesman.com. 220. R. Plant, (2012), The Neo- Liberal State, Oxford University Press, Oxford, pp. 11– 14, passim. 221. And also corruption on behalf of the political scene; See for example for the USA: Z. Teachout, (2014), Corruption in America: From Benjamin’s Franklin Snuff Box to Citizens United, Harvard Business School, Cambridge, MA, pp. 56– 87, passim. 222. J. Gray, (2000), False Dawn: The Delusions of Global Capitalism, Granta Books, London, pp. 45– 76. 223. R. Plant, (2012), The Neo- Liberal State, Oxford University Press, Oxford, p. 24. 224. See also C. Zook, (2012), When ‘creative destruction’ destroys more than it creates, Harvard Business Review Blogosphere, June 27. ‘Creative destruction’ (‘schöpferische Zerstörung’) describes the way in which capitalist economic development arises out of the destruction of some prior economic order: ‘Wiederum aber steigt aus der Zerstörung neuer schöpferischer Geist empor’ (‘Again, however, from destruction a new spirit of creation arises’) in W. Sombart, (1975), Krieg und Kapitalismus, München, Verlag von Duncker & Humblot [1913], Zweiter band, p. 207 (War and capitalism). Although Sombart coined the term first it is was the Austrian economic school- affiliated economist J. Schumpeter in his ‘Capitalism, Socialism and Democracy’ who developed the concept further to imply that the creative- destructive forces unleashed by capitalism would eventually lead to its demise as a system. J. Schumpeter, (2010), Capitalism, Socialism and Democracy, Routledge [1942], London, p. 139. 225. S. Gill, (2008), Power and Resistance in the New World Order, 2nd Ed., Palgrave Macmillan, Houndmills Basingstoke, passim. See also D. Lesage and M. Vermeiren, (2011), Neo- Liberalism at a Time of Crisis: The Case of Taxation, European Review, Vol. 19, Issue 1, pp. 43– 56. 226. P. G. Cerny, (1997), The Paradoxes of the Competition State: The Dynamics of Political Globalization, Government & Opposition, Vol. 32, pp. 251– 274. 227. R. O. Keohane and J. S. Nye, (2000), Globalization: What’s New? What’s Not? (And So What?), Foreign Policy, Vol. 118, pp. 104– 119. 228. D. Lesage, and M. Vermeiren, (2011), Neo- Liberalism At a Time of Crisis: the Case of Taxation, European Review, Vol. 19, Issue 1, p. 46. 229. Ibid., p. 53. 230. See in a Dutch context: I. Agur, (2014), Voorbij de heilige huisjes van de Nederlandse economie, Uitgeverij Balans, Amsterdam. 231. P. W. Zuidhof, (2012), Imaginary Markets: The Discursive Politics of Neo- Liberalism, Diss. Erasmus University Rotterdam, unpublished. 232. J. Habermas, (1985), Die neue Unübersichtlichkeit, Suhrkamp, Berlin, p. 34– 43, passim. 233. B. R. Barber, (1996), Jihad vs. McWorld, Ballantine Books [1995], New York, p. 243: Markets are contractual rather than communitarian … the self- interested motives on the basis of which consumers spend their pennies have nothing to do with the kind of civil society these same consumers hope to live in or the civic objectives they forge together as citizens in democratic political arenas in order to control the public and political consequences of their private consumer choices. 366 Notes

234. M. Foucault, (1994), The Order of Things: An Archaeology of the Human Sciences, Pantheon Books [1971], New York; M. Foucault, (1982), The Archeology of Knowledge, Pantheon Books [1972], New York L’Archeologie du Savoir; M. Foucault, (1991), Governmentality in the Foucault Effect: Studies in Governmentality, G. Burchell, C. Gordon, and P. Miller (eds.), University of Chicago Press, Chicago, pp. 87– 104; M. Foucault, (1997), The Birth of Biopolitics, Ethics: Subjectivity and Truth, P. Rabinow (ed.), The New Press, New York, pp. 73– 79; M. Foucault, (1997), Security, Territory, and Population, Ethics: Subjectivity and Truth, P. Rabinow (ed.) New Press, New York, pp. 67– 71; M. Foucault, (2007), Security, Territory, Population: Lectures at the Collège De France, 1977– 1978, M. Senellart and A. Davidson (eds.), Palgrave Macmillan, Houndmills, Basingstoke, Hampshire, New York; M. Foucault, (2008), The Birth of Biopolitics: Lectures at the Collège De France, 1978– 1979, M. Senellart and Collège de France (eds.), Palgrave Macmillan, New York. 235. Zuidhof analyzes and compares US and Dutch think tanks as they are ultimately well positioned as discursive actors and catalysts when turning neoliberalism ideology into policy and action; Ibid, Chapters 4 and 5. 236. This can be traced back to the discussed Foucauldian theory as well as those supported by Charles Taylor known as ‘modern social imaginaries’. See: C. Taylor, (1984), Foucault on Freedom and Truth, Political Theory, Vol. 12, Issue 2, pp. 152– 183; C. Taylor, (2004), Modern Social Imaginaries, Duke University Press, Durham, NC; C. Taylor, (2007), A Secular Age, Belknap Press of Harvard University Press, Cambridge, MA. 237. V. Schneider and M. Tenbuecken, (2002), Business and the State: Mapping the Theoretical Landscape, Paper presented at the IPSA Business- Government Roundtable, May 2002. 238. For example M. Friedman in his 1953 ‘Essays in positive economics’, University of Chicago Press, Chicago; Ibid., Mosini Chapter 1; She claims that Friedman also went against the view of the time, which maintained that prediction cannot be a sufficient ground for evaluating theories. From these considerations about consistency and validity, Mosini then concludes that Friedman’s policy prescriptions fail to live up to methodological standards of positive science to make the bold claim that ‘given that Friedman must have been aware of the logical inconsistency that burdened his essays, his attribution of objectivity to the core theses of the neoliberal doctrine was based on false pretenses’. In the fifth chapter she focuses on Friedman’s contributions to neoliberalism through his ‘Capitalism and Freedom’ (1962). where he claims that economic freedom promotes political freedom. She concludes: ‘The account given in this chapter of the many challenges brought to Friedman’s apodictic claim that economic freedom promotes political freedom, and the evidence from specific case studies that can easily be generalized, revealed the existence of at least one blatant contradiction to the claim, the Chilean experiment, to which Friedman turned a blind eye’ (p. 119). She concludes that what happened since 2008 in the financial markets qualifies as ‘attributing positive economics scientific status and objectivity, and, on that basis, subordinating to it normative economics, it ensured that regulations were informed not on ethics as traditionally understood but on “ market- ethics”’ (p. 138). The economic success of the real market interventions (such as the Chilean experiment) is disputed as well. Notes 367

239. V. Mosini, (2012), Reassessing the Paradigm of Economics: Bringing Positive Economics Back into the Normative Framework, Routledge, London, p. 4; C.f. the book review by P.- W. Zuidhof in the Erasmus Journal for Philosophy and Economics, Vol. 5, Issue 2, Autumn 2012, pp. 118– 124 who points at some issues related to the book and its content and in particular the claims that are made balanced against the proof tabled and the lack of scientificness in some of her findings, which is somewhat problematic if the core of her claim is the un- scientificness of Friedman’s work. 240. P. W. Zuidhof, (2012), Imaginary Markets: The Discursive Politics of Neo- Liberalism, Diss. Erasmus University Rotterdam, unpublished, Chapter 3, pp. 118– 164. 241. The area of healthcare and affordable housing in The Netherlands would be adamant examples in this context. 242. H. Oliver, (1960), German Neo- Liberalism, The Quarterly Journal of Economics, Vol. 74, Issue 1, pp. 117– 149. 243. An example is that politicians as public managers often state that the (financial) markets force them to take certain actions and/or refrain from others. 244. P. W. Zuidhof, (2012), Imaginary Markets: The Discursive Politics of Neo- Liberalism, Diss. Erasmus University Rotterdam, unpublished, Chapter 3 in fine. 245. W. Brown, (2001), Politics Out of History, Princeton University Press, Princeton, NJ, pp. 34– 56, passim; W. Brown, (2003), Neo- Liberalism and the End of Liberal Democracy, Theory and Event, Vol. 7, Issue 1, pp. 1– 24; W. Brown, (2006), American Nightmare: Neo- Liberalism, Neo- Conservatism, and De- Democratization, Political Theory, Vol. 34, Issue 6, pp. 690– 714. 246. J. Peck, (2010), Constructions of Neo- Liberal Reason, Oxford University Press, Oxford, p. 7. 247. Ibid., Peck Chapter 6, neoliberalism opened up the state in the Bush era to the authoritarian moral politics of neo- conservatism. 248. W. Brown, (2006), American Nightmare: Neo- Liberalism, Neo- Conservatism, and De- Democratization, Political Theory, Vol. 34, Issue 6, pp. 690– 714. Her central argument, which we will further leave aside, is that in the case of the USA, the de- politicized and devalued liberal democratic state of neoliberalism has, subsequently been ‘consecrated’ and filled in with the moral- political rationality of neo- conservatism. Brown has offered some political features of this dressed down market state. Having eroded the state from within, neoliberalism thus created some sort of vacuum at heart of the state. The alleged vacuity of the state should not, however, be misinterpreted as the demise of the state. On the contrary, it appears to have been strengthened. One of the ironies of neoliberalism is that while it may have inaugurated the demise of the modern state, it has far from led to the end of the state, nor to the end of government; P. W. Zuidhof, (2012), Imaginary Markets: The Discursive Politics of Neo- Liberalism, Diss. Erasmus University Rotterdam, unpublished, pp. 266– 267. 249. Cited in P. W. Zuidhof, (2012), Imaginary Markets: The Discursive Politics of Neo- Liberalism, Diss. Erasmus University Rotterdam, unpublished, pp. 266– 267. 250. D. Harvey, (2011), The Enigma of Capital: And the Crisis of Capitalism, Oxford University Press, Oxford, p. 66. 251. W. Brown, (2006), American Nightmare: Neo- Liberalism, Neo- Conservatism, and De- Democratization, Political Theory, Vol. 34, Issue 6, pp. 690– 714. 252. Ibid. 368 Notes

253. Although some claim it continues to dominate markets as was previously the case; see: C. Crouch, (2011), The Strange Non- Death of Neo- Liberalism, Polity, Cambridge. 254. O. Hartwich, (2009), Neoliberalism: The Genesis of a Political Swearword, Centre for Independent Studies, St. Leonards, p. 5. 255. A. Rüstow, (1932), Speech delivered to the Verein für Socialpolitik, cited in R. Ptak, (2009), Neoliberalism in Germany: Revisiting the Ordoliberal Foundations of the Social market Economy, The Road from Mont Pèlerin, in Ph. Mirowski and M. Plehwe (eds.), The Making of the Neoliberal Though Collective, Harvard University Press, Cambridge, MA, pp. 99– 137. 256. R. Raico, (1999), Die Partei der Freiheit, Studien der Geschichte des deutschen Liberalismus, Lucius und Lucius, Stuttgart, pp. 13– 32; see also in a wider context R. Raico, (2012), Classical Liberalism and the Austrian School, L. von Mises Institute, Auburn, AL, pp. 1– 66, 67– 110. 257. Otto von Gierke, Die soziale Aufgabe des Privatrechts, [1889], p. 28, cited in T. Repgen, (2001), Die sociale Aufgabe des Privatsrechts: eine Grundfrage in Wissenschaft und Kodifikation am Ende des 19. Jahrhunderts, Ius Privatum 60, Mohr Siebeck, Thübingen, p. 55, passim. 258. For an analogy in the contemporary EU context see: M. Höpner, (2014), Wie der Europäische Gerichtshof und die Kommission Liberalisierung durchsetzen, MPIfG Discussion Paper 14/8 and R. Mayntz, (2014), Markt oder Staat? Kooperationsprobleme in der Europäischen Union, Leviathan, Vol. 42, Issue 2, pp. 292– 304. The fact that the EU as a political entity is built upon a common market creates a fundamental tension between economic and political principles in joint policy decision- making, she argues. The observed difficulties in reaching joint policy decisions have their roots in both political and economic interests, which, instead of conflicting with each other, merge into economic state interests. 259. O. Hartwich, (2009), Neoliberalism: The Genesis of a Political Swearword, Centre for Independent Studies, St. Leonards, p. 8. 260. Ibid., p. 12. 261. A. Rüstow, (2008), Zwischen Kapitalismus und Kommunismus, in N. Goldschmidt and M. Wohlgemuth (eds.), Grundtexte zur Freiburger Tradition der Ordnungsökonomik, Mohr Siebeck [1949], Thübingen, pp. 423– 448. During (and partly after) the Interbellum, liberalism overall was divided in terms of its positions; see in detail M. Freeden, (1986), Liberalism Divided: A Study in British Political Though 1914– 1939, Oxford University Press, Oxford. 262. O. Hartwich, (2009), Neoliberalism: The Genesis of a Political Swearword, Centre for Independent Studies, St. Leonards, p. 16. 263. Werner Sombart (1863– 1941) was a German economist and sociologist known for his social activism. 264. O. Hartwich, (2009), Neoliberalism: The Genesis of a Political Swearword, Centre for Independent Studies, St. Leonards, p. 14; Michael von Prollius, (2007), Menschenfreundlicher Neoliberalismus, Frankfurter Allgemeine Sonntagszeitung, November 10, p. 13; Marc Beise, (2008), Das große Missverständnis, Süddeutsche Zeitung, November 24; Bert Losse, (2009), Chaos der Beutewirtschaft, Wirtschafts Woche, March 9, p. 42; Romanus Otte, (2008), Herzlichen Glückwunsch, Neoliberalismus!, Die Welt, August 23, p. 9. 265. A. Rüstow, (1950) Das Versagen des Wirtschaftsliberalismus, 2nd Ed., Bad Godesberg, Küpper vorm [1945], Bondi, p. 78. In ‘The Failure of Economic Notes 369

Capitalism’ he noted: ‘We [i.e. the neoliberals] agree with Marxists and socialists in the conviction that capitalism is untenable and needs to be overcome. And we also think that their proof that exaggerated capitalism consequently leads to collectivism is correct and an ingenious discovery of their master [i.e. Karl Marx]. To acknowledge this seems to be required by intellectual honesty. However, we reject the errors which Marx has adopted from historic liberalism. And if we, together with the socialists, reject capitalism, then we reject the collectivism which grows out of exaggerated capitalism even more. Our most severe accusation against capitalism is just this: that it (just as the collectivists teach themselves) sooner or later must lead to collectivism.’ 266. See endnotes 121 and 124. 267. A detailed overview of his social and economical agenda in A. Rüstow, (2008), Zwischen Kapitalismus und Kommunismus, N. Goldschmidt and M. Wohlgemuth (eds.), Grundtexte zur Freiburger Tradition der Ordnungsökonomik, Mohr Siebeck [1949], Thübingen, pp. 423– 448. 268. O. Hartwich, (2009), Neoliberalism: The Genesis of a Political Swearword, Centre for Independent Studies, St. Leonards, p. 16. 269. See footnote 266. Rüstow used it for the liberal hardliners with the Mont Pelerin Society (Hayek et al.). 270. A. Rüstow, (1950) Das Versagen des Wirtschaftsliberalismus, 2nd Ed., Bad Godesberg, Küpper vorm [1945], Bondi, pp. 55– 98; A. Rüstow, (1961), Paläoliberalismus, Kommunismus und Neoliberalismus, in F. Greiss and F. W Meyer (eds.), Wirtschaft, Gesellschaft und Kultur, Festgabe für Alfred Müller- Armack, Duncker & Humblot, Berlin, p. 70. 271. The seeds of the schism between the true neoliberals (Lippmann, Rüstow) and the liberal hardliners (Hayek, von Mises) were already planted at the initial colloquium. Although there was a joint closing summary, the underlying current was recognizable and became clearer as time passed – not surprisingly, as there are quite a few irreconcilable differences in those positions as to what caused monopolies and cartels, the role of social policy, and interventionism. Also the role of the state was cause for debate, as the neoliberals saw a powerful state ordering and structuring the free market, while for the liberal hardliners the only legitimate role for the state as to abolish barriers to market entry. The latter see in true neoliberalism a precursor of outright socialism and totalitarian planning, where the state will ultimately dictate to the free markets what it considers right and wrong: see Ludwig von Mises, (1996), Human Action: A Treatise on Economics, 4th Ed., Fox & Wilkes [1949], San Francisco, pp. 723– 724. 272. Which is in sharp contrast with the un- nuanced and even tragic analysis as proclaimed in current times. H. Achterhuis, (2010), De utopie van de vrije markt, Lemniscaat, Rotterdam. 273. D. Acemoglu, (2012), The World Our Grandchildren Will Inherit: The Rights Revolution and Beyond, Economic Possibilities for Our Grandchildren, Ignacio Palacio- Huerta (ed.), MIT Press, Cambridge, MA, pp. 1– 13. 274. Hayek is also a clear advocate of Oakeshott’s fundamental premises in F. Hayek, (1982) Law, Legislation and Liberty, Vol. 2: The Mirage of Social Justice, Routledge and Kegan Paul [1976], London, p. 99, passim. 275. M. Oakeshott, (2006), Lectures in the History of Political Thought, T. Nardin and L. O’Sullivan (eds.), Imprint Academic, Exeter, pp. 34– 42, passim and R. Plant, Ibid., p. 6. 370 Notes

276. R. Plant, (2012), The Neoliberal State, Oxford University Press, Oxford, p. 6. 277. Plant, ibid., p. 7. 278. M. Oakeshott, (2006), Lectures in the History of Political Thought, T. Nardin and L. O’Sullivan (eds.), Imprint Academic, Exeter, p. 472; see also R. Plant, ibid., pp. 6– 7. 279. R. Plant, (2012), The Neoliberal State, Oxford University Press, Oxford, p. 7 and M. Oakeshott, (2006), Lectures in the History of Political Thought, T. Nardin and L. O’Sullivan (eds.), Imprint Academic, Exeter, pp. 484– 488. 280. Plant reiterates (pp. 7– 8): ‘In a nomocracy, the government (a) is recognized as having sovereign authority to make and promulgate the law but the law is not to be seen as a means of attaining common or collective goods or outcomes; (b) is ‘the guardian of a system of prescriptive conditions to be subscribed to in making choices’; and (c) is concerned with the maintenance and improvement, where necessary, of the set of rules constituting civil relationships between individuals who entertain different views about their wants, goals, needs, and purposes.’ 281. M. Oakeshott, (1975), On Human Conduct, The Clarendon Press, Oxford, pp. 232– 233 and R. Plant, ibid., p. 8. 282. M. Oakeshott, (1975), On Human Conduct, Oxford: The Clarendon Press, Oxford. 283. The continental definition of ‘Rechtsstaat’ is broader. This concept of Rechtsstaat, originates in 19th century German jurisprudence. This continental approach is focused heavily on the differentiation between Gesetz und Recht, loi et droit. This distinction doesn’t seem to come through as articulated in the common law tradition. See in detail: F. D’Agostino, The State under the Rule of Law, A. M. Rieu and G. Duprat (eds.), (1995), European Democratic Culture, Routledge, London/ New York [1993], p. 105. The concept of the Rechtsstaat as it has developed over time (the state under the rule of law) is the state that not only exercises its power as given under the law but also within the boundaries as shaped by the constitutional recognition of the ‘inviolable rights of the individual’. The essence of the Rechtsstaat in the continental way (as developed out of the German tradition) consisted in the divorce of the political structure of the state from its legal organization; see in detail: N. Bobbio, The Future of Democracy, (1987), p. 25 and F. L. Neumann, (1986) The Rule of Law: Political Theory and the Legal System in Modern Society, Berg Publishers, Leamington Spa, pp. 179– 182. 284. M. Oakeshott, (1975), On Human Conduct, The Clarendon Press, Oxford, p. 138. 285. Hence the preference of neoliberals for common law over the codified ‘rule of law’. 286. R. Plant, (2012), The Neoliberal State, Oxford University Press, Oxford, p. 11. 287. M. Oakeshott, (2006), Lectures in the History of Political Thought, ed. T. Nardin and L. O’Sullivan, Imprint Academic, Exeter, p. 485. 288. F. Hayek, (1976), Law, Legislation and Liberty, Vol. II: The Mirage of Social Justice, Routledge and Kegan Paul, London, p. 106. 289. R. Plant, (2012), The Neoliberal State, Oxford University Press, Oxford, p. 11, ‘a nomocratic state and its laws have to acknowledge some set of goals. It cannot be impartial or indifferent to all goals. Law cannot be pointless. It cannot be totally non- instrumental. It has to facilitate the achievement of some goals’. 290. M. Oakeshott, Lectures in the History of Political Thought, ed. T. Nardin and L. O’Sullivan. Imprint Academic, Exeter, p. 485. 291. M. Oakeshott, (1983), ‘The Rule of Law’, On History, Blackwell, Oxford, pp. 119– 129. Notes 371

292. Hayek, ibid. in contrast to prescribed goods and objectives. 293. Whereby Hayek, Oakeshott, Buchanan, Rothbard etc. prefer the nomocratic model. 294. R. Plant, (2012), The Neoliberal State, Oxford University Press, Oxford, pp. 13– 14 as well as K. Dyson, (1980) The State Tradition in Western Europe, Martin Robertson, Oxford University Press, Oxford, pp. 120– 143. 295. Which seems the preferred model of most neoliberals in the 20th century (von Mises, Hayek, Nozick, etc.), see in extenso: T. Papaioannou, (2012), Reading Hayek in the 21st Century: A Critical Enquiry into his Political Thought, Palgrave Macmillan, New York, pp. 160– 165. 296. R. Plant, (2012), The Neoliberal State, Oxford University Press, Oxford, Ibid. p. 16. 297. Ibid., p. 19. See also for a wider discussion about the ‘inner morality of law’ (pp. 16– 19) bringing nomocracy and telocracy closer together, if the Fuller criteria are fulfilled; see L. Fuller, (1962), The Morality of Law, Yale University Press, New Haven. 298. Scholars such as Friedrich Hayek have criticized legal positivism for undermining constitutionalism and the rule of law, an implication of which is weak- ened private property rights. For a critique of that position see: N. Berggren, (2006), Legal Positivism and Property Rights: A Critique of Hayek and Peczinek, Constitutional Political Economy, Vol. 17, Issue 3, pp. 217– 235. 299. R. Plant, (2012), The Neoliberal State, Oxford University Press, Oxford, p. 19; See also in extenso F. A. Hayek, (1993), The Constitution of Liberty, [1960] Routledge, London, Chapter 14. 300. The different stages in his professional career with respect to his relationship with positivism (and other themes) as a scholar are eloquently analyzed in S. Fleetwood, (1995), Hayek’s Political Economy: The Socio- Economics of Order, Routledge, London. 301. F. Hayek, (1976), Law, Legislation and Liberty, Vol. II: The Mirage of Social Justice, Routledge and Kegan Paul, London, p. 46. 302. F. Hayek, (1978), Law, Legislation and Liberty, Vol. I: Rules and Order, University of Chicago Press [1973], Chicago p. 119. 303. C. Menger, (1985) Investigations into the Method of the Social Sciences with Special Reference to Economics, New York University Press, New York, p. 233; and J. Shearmur, (1996), Hayek and After, Routledge and Kegan Paul, London, p. 44. 304. R. Plant, (2012), The Neoliberal State, Oxford University Press, Oxford, p. 23. 305. G. Hegel calls it ‘determined universality’ in his ‘The Philosophy of Right’ (‘Grundlinien der Philosophie des Rechts’), trans. T. M. Knox, The Clarendon Press, Oxford [1820], 1952, paragraph 211. 306. A. Thibaut, (1814), Ueber die Nothwendigkeit eines allgemeinen bürgerlichen Rechts für Deutschland (p. 42), DERS, Civilistische Abhandlungen, Heidelberg, p. 413; K. Savigny, (1999), Vom Beruf unserer Zeit für Gesetzgebung und Rechtswissenschaft, (1831) trans. A. Hayward, Littlewood. Reprinted by Ayer Co., North Stratford, London, p. 66. 307. For example, in the case of taxation (which is coercive), the first body determines the principles under which taxation should be levied. The second body should determine how much tax should be raised, etc. See: F. Hayek, (1978), New Studies in Philosophy, Politics, Economics and the History of Ideas, University of Chicago Press, Chicago, pp. 21– 25, passim; Also in E. Butler, (2012), Friedrich Hayek: The Ideas and Influence of the Libertarian Economist, Harriman House, Hampshire, pp. 132– 156. 372 Notes

Earlier, Hayek had already concluded that the rule of law requires an independent judiciary. The Rule of Law means that ‘the laying- down of new general rules’ must be separate from ‘their application to particular cases’. These two functions ‘must be performed separately by two coordinated bodies before it can be determined whether coercion is to be used in a particular case’. See F. Hayek, (1993), The Constitution of Liberty, Routledge [1960], London, pp. 210– 211. 308. M. Wörsdörfer, (2010), Ordoliberalism and The Evolution of Norms, Normative Orders Working Paper, 07/2010, Cluster of excellence at Goethe University, Frankfurt am Main; see also J. Birner and R. van Zijp (eds.), (1994), Hayek. Coordination and Evolution. His Legacy in Philosophy, Politics, and the History of Ideas, Routledge, London and New York, pp. 54– 65, passim. 309. M. Wörsdörfer, (2010), Ordoliberalism and The Evolution of Norms, Normative Orders Working Paper, 07/2010, Cluster of excellence at Goethe University, Frankfurt am Main, footnote 26; Also; A. Rüstow, Ortsbestimmung der Gegenwart. Eine universalgeschichtliche Kulturkritik, (‘Determination of the Present’s Location’), 3 Volumes, 1950– 1957, in particular Volume 1: Ursprung der Herrschaft (‘Origin of Rule’); A. Rüstow, (1980), Freedom and Domination: A Historical Critique of Civilization, S. Attanasio (ed.), Princeton University Press, Princeton, NJ, 128– 132, 343– 435, passim. 310. F. Hayek, (1993), The Constitution of Liberty, [1960] Routledge, London, p. 216. F. Hayek, (1955), The Political Ideal of the Rule of Law, Bank of Egypt, Cairo, pp. 44– 45. 311. Ibid., pp. 30– 35.

3 Changing Sovereignty, Democracy, Individual Freedom, and the Evolving Dynamics of Taxation in a Modern Neoliberal State within Europe

1. E. Cudworth, T. Hall, and J. McGovern, (2007), The Modern State: Theories and Ideologies, Edinburgh University Press, Edinburgh, p. 1. 2. C. W. Barrow, (1993), Critical Theories of the State, University of Wisconsin Press, Madison, pp. 9– 11. 3. Ibid., p. 95. 4. C. Sartwell, (2008), Against the State: An Introduction to Anarchist Political Theory, SUNY Press, Albany, NY, p. 25; C. Flint and P. J. Taylor, (2007), Political Geography, Pearson Education, Harlow, p. 137. 5. V. Tiskov, (2000), Forget the ‘Nation’: Post- Nationalist Understanding of Nationalism, Ethnic and Racial Studies, Vol. 23, Issue 4, pp. 625– 650 in particular p. 627. 6. For an overview of the evolution and its characteristics from the pre- nation states to the modern state concept, see: J. L. M. Gribnau, (2009), Soevereiniteit en legitimiteit: grenzen aan (fiscale) regelgeving, SdU Uitgevers, Amersfoort, Chapter 4, pp. 15– 26. 7. A. Kohli, (2004), State-Directed Development: Political Power and Industrialization in the Global Periphery, Cambridge University Press, Cambridge, p. 1. 8. E. Ferragina and M. Seileb- Keiser, (2011), Welfare Regime Debate: Past, Present and Future, Policy & Politics, Vol. 39, Issue 4, p. 598; W. A. Arts and J. P. T. M. Gelissen, (2002), Three Worlds of Welfare Capitalism or More? A State- of- the- Art Report, Journal of European Social Policy, Vol. 12, Issue 2, pp. 137– 158. 9. G. Esping- Andersen, (1990), The Three Worlds of Welfare Capitalism, Princeton University Press, New Jersey, pp. 23– 48, passim. Notes 373

10. See also: Ch. Tilly, (1975), Reflections on the History of European State- Making, Cambridge University Press, Cambridge, p. 4. 11. Ibid. endnote 8, E. Ferragina and M. Seileb- Keiser, (2011), Welfare Regime Debate: Past, Present and Future, Policy & Politics, Vol. 39, Issue 4, p. 584. 12. G. Esping- Andersen (1985), Politics Against Markets, Princeton University Press, Princeton, pp. 48– 65, passim. 13. Ibid. endnote 9. 14. ‘All attempts to develop terminological consensus around “nation” resulted in failure’, concludes V. Tishkov, (2000), Forget the ‘Nation’: Post- nationalist Understanding of Nationalism, Ethnic and Racial Studies, Vol. 23, Issue 4, p. 627 [ 625– 650]. 15. For a more comprehensive (and historical) introduction into the concept of sovereignty and tax sovereignty in particular see: S. Douma, (2011), Optimization of Tax Sovereignty and Free Movement, IBFD, IBFD Doctoral Series Nr. 21, Amsterdam, pp. 79– 107; M. Isenbaert, (2010), EC Law and the Sovereignty of Member States in Direct Taxation, IBFD Doctoral Series Nr. 19, Amsterdam, pp. 5– 81. 16. F. H. Hinsley, (1986), Sovereignty, 2nd Ed., Cambridge University Press, Cambridge, pp. 1– 2. 17. M. Van Hoecke, (2004), De legitimatie van het recht in een democratische samenleving, in M. Adams and P. Popelier (eds.), Recht en democratie: De democratische verbeelding in het recht, Intersentia, Antwerpen, pp. 68 ff. 18. J. T. Scholtz, (1998), Trust, Taxes and Compliance, in V. Braithwaite and M. Levi (eds.), Trust and Governance, Russell Sage, New York, p. 163. 19. E. M. Uslaner, (2002), The Moral Foundations of Law, Cambridge University Press, Cambridge, p. 47; T. R. Tyler, (2006), Why People Obey the Law, Princeton University Press, Princeton, NJ, pp. 34– 79. 20. E. M. Uslaner, (2002), The Moral Foundations of Trust, Cambridge University Press, Cambridge, pp. 4– 48 as well as T. R. Tyler, (2006), Why People Obey the Law, Princeton University Press, Princeton, NJ, pp. 45– 79. 21. O. Gierke, (1996), Political Theories of the Middle Age, trans. Maitland, Bristol, pp. 65– 70 and H. J. Berman, (1983), Law and Revolution: The Formation of the Western Legal Tradition, Harvard University Press, Cambridge/London, pp. 205– 208. 22. P. Leupen, (1998), Keizer in zijn eigen rijk. De geboorte van de nationale staat, Wereldbibliotheek, Amsterdam, pp. 133– 150. For a contrario regarding the situation in the 14th century see: E. H. Kantorowicz (1981), The King’s Two Bodies: A Study in Medieval Political Theology, Princeton University Press [1957], New Jersey, in particular Chapters III and IV. 23. M. van Creveld, (1999), The Rise and Decline of the State, Cambridge University Press, Cambridge, MA, pp. 1– 59. 24. S. Gordon, (1999), Controlling the State: Constitutionalism from Ancient Athens to Today, Harvard University Press, Cambridge MA, pp. 1– 3. In general empires lack the independent functioning of a politically inspired state built on political power. 25. Or at least that’s when the process started. The exact date is hard to define and to a large degree irrelevant for the discussion that follows. No scientific consensus exists either about a potential ‘exact’ date. 26. Ch. Tilly, (1975), Reflections on the History of European State- Making, in Ch. Tilly (ed.), The Formation of National States, Princeton University Press, New Jersey, pp. 3– 5. 27. A. Mazzacane, (1995), Law and Jurists in the Formation of the Modern State, in J. Kirchner (ed.), The Origins of the State in Italy, 1300– 1600, University of Chicago 374 Notes

Press, Chicago, pp. 65– 70. What is now known as Italy played a primordial role in this evolution. See: J. L. M. Gribnau (2009), Soevereiniteit en legitimiteit: grenzen aan (fiscale) regelgeving, SdU Uitgevers, Amersfoort, pp. 16– 19. 28. J. - C. Hocquet, (1995), City- State and Market Economy, in R. Bonney (ed.), Economic Systems and State Finance, Oxford University Press, Oxford, pp. 80– 100. 29. For example the Habsburg Empire in the 16th century; see D. E. H. de Boer, M. Boone, and W.A.M. Hessing, (1992), Delta I: De Middeleeuwen 300– 1500, Leiden/Antwerpen, pp. 230– 240. 30. Regarding the mechanisms for acquiring autonomous state power, see: M. Mann, (1985), The Autonomous Powers of the State: Its Origins, Mechanisms and Results, Archives Européene de sociologie, Vol. 25, p. 203. 31. W. Blockmans and W. Prevenier, (1997), De Bourgondiërs: De Nederlanden op weg naar eenheid 1384– 1530, Meulenhoff, Amsterdam/Leuven, pp. 208– 211. 32. J. R. Strayer, (1970), On the Medieval Origins of the Modern State, Princeton University Press, Cambridge, pp. 43– 46. 33. A large part of those increasing revenues was used for wars and territorial expansion. See: Ch. Tilly, (1975), Reflections on the History of European State- Making, Cambridge University Press, Cambridge, passim. 34. M. A. Anderson, (1998), The Origins of the Modern European State System 1494– 1618, Longman, London/New York, pp. 35– 40. R. Bonney, (1995), Revenues, in R. Bonney (ed.), Economic Systems and State Finance, Oxford University Press, Oxford, pp. 420– 506; J. Gelabert, (1995), The Fiscal Burden, in R. Bonney, (ed.), Economic Systems and State Finance, Oxford University Press, Oxford pp. 539– 577. 35. J. Given, (1990), State and Society in Medieval Europe: Gwynedd and Languedoc under Outside Rule, Cornell, Ithaca, NY, p. 255. 36. S. Eisenstadt, (1969), The Political Systems of Empires, The Free Press, New York, p. 5; R. M. MacIver, (1926), The Modern State, Oxford University Press, New York, p. 22; Ch. Tilly, (1975), Reflections on the History of European State- Making, in Ch. Tilly (ed.), The Formation of National States in Western Europe, Princeton University Press, Princeton, NJ, p. 27; M. Weber, (1968), Economy and Society, Bedminster Press, New York, Vol. I, p. 64; M. Mann, (1985), The Autonomous Powers of the State: Its Origins, Mechanisms and Results, Archives Européennes de sociologie, Vol. 25, pp. 185– 213. Mann highlights the two levels of analysis included in most definitions, being an institutional one (definition in terms of what it looks like) and a functional one (a definition in terms of what it does), Ibid. p. 189. 37. Mann calls them ‘ideal‘ types, Ibid. p. 193. 38. R. Lesaffer, (2000), De opmars van wetgeving in de continentale juridische tra- ditie (11de- 19de eeuw), in B. van Klink and W. Witteveen (red.), De overtuigende wetgever, Tjeenk Willink, Deventer, pp. 32– 39. 39. O. F. Gierke, (1996), Political Theories of the Middle Age, Cambridge University Press, Cambridge, pp. 91– 95. 40. F. H. M. Grapperhaus, (1989), Taxes, Liberty and Property: The Role of Taxation in Democratization and National Unity 511– 1787, De Walburg Pers/Kluwer, Zutphen, pp. 65– 69. 41. J. Bodin (2009), On Sovereignty: Six Books on the Commonwealth, CreateSpace Independent Publishing Platform, Seattle, Chapters VIII and X of Book I. 42. B. van Roermund, (2002), Seizing Sovereignty: The Law of its Image, Social and Legal Studies, Vol. 11, Issue 3, pp. 396– 399. 43. J. Bodin, (1992), On Sovereignty, in J. H. Franklin (ed.), Six Books on the Commonwealth, Cambridge University Press [1576], Cambridge, pp. 23– 24 (Book I, Chapter 8, 374– 375). Notes 375

44. ‘la loy de Dieu ou de nature’, Ibid. p. 8 (Book I, Chapter 8, p. 354). 45. One of the objectives to be precise. 46. N. Janssen and R. Michaels, (2007), Private Law and the State: Comparative Perceptions and Historical Observations, Rabels Zeitschrift für Ausländisches und Internationales Privatrecht, Vol. 71, Issue 2, pp. 13– 44. 47. J. Bodin, (1992), On Sovereignty, in J. H. Franklin (ed.), Six Books on the Commonwealth, Cambridge University Press [1576], Cambridge, pp. 23– 24, endnote 43. 48. Ibid. p. 21 (I, 8, 372) as well as M. Wolfe (1968), Jean Bodin on Taxes: The Sovereignty- Taxes Paradox, Political Science Quarterly, Vol. 83, Issue 2, pp. 268– 284. 49. J. Bodin, (1992), On Sovereignty, in J. H. Franklin (ed.), Six Books on the Commonwealth, Cambridge University Press [1576], Cambridge, p. 18 (I, 8, p. 368). 50. R. Janse, (2000), De rechtsfilosofie van Thomas Hobbes, Eburon, Delft, pp. 4 ff. 51. Ibid. pp. 61– 64; Q. Skinner, (2002), Hobbes and the Purely Artificial Person of the State, in Q. Skinner (ed.), Visions of Politics, Volume III: Hobbes and Civil Science, Cambridge University Press, Cambridge, pp. 198 ff. 52. S. E. Cuypers, (2007), De Morele Psychologie van Thomas Hobbes, in M. Adams and W. Lemmens (eds.), In de schaduw van Leviathan, Pelckmans, Kapellen, pp. 66 ff. 53. L. Lessay, (1990), Souverainité absolue et souverainité legitimé, in Y. C. Zarka and J. Bernhardt (eds.), Thomas Hobbes Philosophie Première Théorie de la Science Politique, PUF, Paris, p. 279. 54. F. H. Hinsley, (1986), Sovereignty, Cambridge University Press, Cambridge, pp. 143– 144. 55. U. Weiss, (1980), Das philosophische System von Thomas Hobbes, Cannstatt, Stuttgart/Bad, p. 218. 56. L. Strauss, (1953), Natural Right and History, Chicago University Press, Chicago, pp. 181– 182. 57. D. H. Sacks, (1994), The Paradox of Taxation: Fiscal Crisis, Parliament, and Liberty in England, 1450– 1640, in Ph. Hoffman and K. Norberg (eds.), Fiscal Crisis, Liberty and Representative Government, Stanford University Press, Stanford, pp. 55– 56; D. Hirst, (1986), Authority and Conflict: England 1603– 1658, Harvard University Press, Cambridge MA, pp. 177 ff. 58. O. I. M. Ydema, (1997), Hoofdstukken uit de geschiedenis van het belastingrecht, Diss. Leiden, Groningen, pp. 237– 238. 59. G. Belaief, (1971), Spinoza’s Philosophy of Law, Mouton, The Hague/Paris, p. 17. 60. J. L. M. Gribnau, (1992), De macht van het recht. Spinoza’s bijdrage aan de rechtstheorie, NJB, Vol. 67, Issue 43, pp. 1443- 1451; H. W. Blom, (1993), The Moral and Political Philosophy of Spinoza, in G. H. R. Parkinson (ed.), Routledge History of Philosophy, Vol. 4, The Renaissance of Seventeenth- century Rationalism, Routledge, London, p. 336. 61. B. de Spinoza (2005), Ethics, trans. E. Curley, Penguin Books [1677], New York, p. 64. 62. B. de Spinoza, (1985), Hoofdstukken uit de politieke verhandeling, Boom, Meppel/ Amsterdam, TP 3,7; also: W. Bartuschat, (1992), Spinozas Theorie des Menschen, Meiner, Hamburg, p. 247. 63. F. Maiolo, (2007), Medieval Sovereignty: Marsilius of Padua and Bartolus of Saxoferrato, Eburon Academic Publishers, Delft, pp. 22– 23. 64. B. de Spinoza, (1985), Hoofdstukken uit de politieke verhandeling, Boom, Meppel/ Amsterdam, TP 3, 7, 3, 9 and 2, 17. 65. N. Bobbio, (1989), Democracy and Dictatorship, University of Minneapolis Press, Minneapolis, p. 144. 66. B. de Spinoza, (1997), Theologisch- Politiek Traktaat, Wereldbibliotheek [1670], Amsterdam, p. 356 and pp. 427– 428. 376 Notes

67. P. Drucker, (1992), Managing For the Future: The Nineties and Beyond, Truman M, Talley, New York. 68. N. K. Göksel, (2008), Globalisation and the State, Research Paper, Dokuz Eylul University, Buca, Izmir, pp. 3– 7. 69. L. Mosley, (2005), Globalisation and the State: Still Room to Maneuver, New Political Economy, Vol. 10, Issue 3, September, pp. 355– 362. 70. D. W. Drezner, (2001), Globalization and Policy Convergence, International Studies Review, Vol. 3, Issue 1, pp. 53– 78. 71. E. Engelen typecasts this dynamic as Corpocracy (‘Corpocratië’), http://www. nrc.nl/handelsblad/van/2014/januari/04/red- het- kapitalisme- van- corpocratie- 1331584. 72. L. Mosley, (2005), Globalisation and the State: Still Room to Maneuver, New Political Economy, Vol. 10, Issue 3, September, pp. 358– 362. 73. P. Q. Hirst and G. Thompson, (1996), Globalisation in Question: The International Economy and the Possibilities of Governance, Blackwell, Cambridge, p. 186. 74. Ibid. p. 17. 75. Ibid. pp. 183– 191. 76. For an excellent overview of the reasons, see: I. Otker- Robe, (2014), Global Risks and Collective Action Failures: What Can the International Community Do?, IMF Working Paper Series, WP/14/195. 77. I. Berlin, (1969), Two Concepts of Liberty, Oxford University Press, Oxford; Isaiah Berlin (1958) Four Essays on Liberty, Oxford University Press, Oxford. 78. I. Berlin, (1990), The Pursuit of the Ideal, Princeton University Press, Princeton, NJ; I. Berlin, (1998), The Crooked Timber of Humanity, Princeton University Press, Princeton, NJ, p. 12. 79. I. Berlin, (1969), Two Concepts of Liberty, Oxford University Press, Oxford, pp. 121– 122, 130. The ability to choose among alternatives does not necessarily warrant freedom, as undue power dynamics between individuals or between individuals and the state might compromise that freedom. 80. The fact that positive and negative freedom can be qualified as two sides of the same coin does not necessarily imply that they cannot exist separated from each other. It is claimed by others that they are indistinguishable, and often argued that the preservation of negative liberty requires positive action on the part of the government or society to prevent some individuals from taking away the liberty of others. 81. J. L. M. Gribnau, (2012), Instrumentalisme and vrijheid, Nederlands Tijdschrift voor Fiscaal Recht, NTFR, Vol. 517, p. 4. 82. I. Berlin, (1969), Two Concepts of Liberty, Oxford University Press, Oxford, p. 121/131. Ch. Taylor, (1979), What’s Wrong with Negative Liberty, in A. Ryan (ed.), The Idea of Freedom: Essays in Honour of Isaiah Berlin, Oxford University Press, Oxford, pp. 211– 229. 83. G. A. van Asperen, (1993), Het bedachte leven: beschouwingen over maatschappij, zingeving en ethiek, Boom, Amsterdam, p. 111. 84. M. Viroli, (2002), Republicanism, Hill and Wang, New York, p. 35, referring to Philip Pettit. 85. Ibid. p. 43. On pp. 37– 38, he gives a fiscal example: ‘A law that requires that I and all other citizens pay taxes in proportion to our income’. 86. Ibid. p. 43. 87. W. N. A. Klever, (1985), Inleiding, in B. De Spinoza (ed.), Hoofdstukken uit de politieke verhandeling, Boom, Meppel/Amsterdam, pp. 33 & 50. Notes 377

88. K. Faulks, (2000), Citizenship, Routledge, London/New York, p. 56. 89. R. Bauböck, (2001), Recombinant Citizenship, in A. Woodward and M. Kohli (eds.), Inclusions and Exclusions in European Societies, Routledge, London and New York, pp. 38– 58. 90. A. D. Smith, (1995), Nations and Nationalism in a Global Era, Polity Press, Cambridge, p. 117. 91. K. Faulks, (1999), Political Sociology: A Critical Introduction, Edinburgh University Press, Edinburgh, p. 136. 92. C. Evans, (2002), Pocket Dictionary of Apologetics & Philosophy of Religion, InterVarsity Press, Downers Grove IL. 93. P. H. Schuck, (2002), Liberal Citizenship, in E. Isin and B. Turner (eds.), Handbook of Citizenship Studies, Sage, London/Thousand Oaks, New Delhi, pp. 131– 144 in particular p. 132. 94. R. Lister, (2003), Citizenship: Feminist Perspectives, 2nd Ed., Palgrave Macmillan, New York, p. 25. 95. See in detail: J. Fierro, (2009), Citizenship and Democracy in Latin America and Chile, Working Paper, Mimeo, p. 12: ‘Neo- republicanism views a citizen as someone who has three characteristics. Firstly, someone who is conscious of his or her role as a responsible and active member of society, and thus actively participates in the future configuration of society through debate over and elaboration of public decisions. Secondly, someone who recognizes political communities as indispensable and decisive environments for his or her full development, and accordingly identifies himself or herself with the political community to which he or she belongs. Thirdly, someone who places great emphasis on the public sphere, and consequently is committed to promoting the common good through active political participation’; See also D. Miller, (2002), Citizenship and National Identity, Polity Press, Cambridge. 96. M. J. Sandel, (1998), Democracy’s Discontent: America in Search of a Public Philosophy, The Belknap Press, Harvard University Press, Cambridge, MA, London, p. 5. 97. J. Fierro, (2009), Ibid., pp. 14– 15: ‘Criticism of the liberal concept of liberty as non- interference is partly rooted in the neo- roman theory. This theory calls in doubt the liberal assumption that individual liberty is basically a matter of non- interference, where the state’s main purpose is to ensure that its citizens can pursue their chosen goals’, See also Q. Skinner, (1998), Liberty Before Liberalism, Cambridge University Press, Cambridge, pp. 115– 120. 98. M. Viroli, (2002), Republicanism, Hill and Wang, New York, pp. 57– 58 and P. Pettit, (2001), A Theory of Freedom, Polity, Cambridge, pp. 21– 45, passim. 99. M. Viroli, (2002), Republicanism, Hill and Wang, New York, p. 35. 100. Viroli, Ibid. p. 62. 101. C. Loonstra and P. Cliteur, (1987), Het vrijheidsconcept van Ralf Dahrendorf, Nederlands tijdschrift voor rechtsfilosofie & rechtstheorie, Vol. 16, pp. 92– 102. 102. R. Dahrendorf, (1979), Life chances, Approaches to Social and Political Theory, Weidenfeld and Nicolson, London, pp. 34– 54 in particular p. 43. 103. R. Dahrendorf, (1983), Die Chancen der Krise: uber˝ die Zukunft der Liberalismus, DVA, Stuttgart, pp. 65– 89. 104. R. Dahrendorf, (1976), Inequality, Hope and Progress, Liverpool University Press, Liverpool. 105. Two examples are given in Ralf Dahrendorf by C. Loonstra in C. Loonstra, (1990), Filosofen van het hedendaags liberalisme (red. P. Cliteur and G. van der 378 Notes

List), Kok Agora, Kampen, p. 128. Rights such as old age pension and education have all been on Dahrendorf’s list and being taken off at a later stage. It is quite unclear, however, which verifiable criteria were used to justify the decision. This is one of the weaknesses in what for the rest can constitute a solid theory, as there has never been a systematic deepening of his thoughts regarding these criteria. 106. R. Dahrendorf, (1966), Markt und Plan, Zwei Typen der Rationalität, Mohr Siebeck, Walter Eucken Instituut Nr. 14. 107. Something Rousseau already referred to in J. J. Rousseau, (1999), The Social Contract, A Discourse on the Origin of Inequality, and A Discourse on Political Economy, Classic Books International [1762], New York, pp. 56– 75. 108. I. Illich, (2001), Tools for Conviviality, Marion Boyars Publishers, London, pp. 67– 87, passim. 109. A point analyzed in C. Castoriadus, (1999), L’Institution imaginaire de la société, Seuil [1975], Paris, most recent edition in Collection Points Essais, who was first to point this out: while both types of societies are subject to the creation of institutions one way or the other through laws, traditions, and behaviors (‘mores’), they tend to deviate in how they are managed and which undercurrent determines their functioning. Most states start off as autonomous societies before they come adrift, ending up with situations in which citizens do not legislate directly but delegate this power to a group of experts who remain in power, largely unchecked by official means. 110. See further on the topic: P. Auerswald, (2012), The Coming Prosperity: How Entrepreneurs are Transforming the Global Economy, Oxford University Press, Oxford. 111. Berlin disagrees with Mill on his liberal interpretation of freedom. See I. Berlin, (1969), Two Concepts of Liberty, Oxford University Press, Oxford, p. 7. Inequality, lack of order, etc. could all be justified if the liberal despot were to leave his subjects a wide range of liberties. 112. Ch. Taylor, (1979), What’s Wrong with Negative Liberty, in A. Ryan (ed.), The Idea of Freedom: Essays in Honour of Isaiah Berlin, Oxford University Press, Oxford, pp. 211– 229. 113. T. H. Green, (1986), Lecture on Liberal Legislation and Freedom of Contract, in Paul Harris and John Morrow (eds.), T. H. Green, Lectures on the Principles of Political Obligation and Other Writings, Cambridge University Press, Cambridge (Reprint Cambridge, [1881]), pp. 210– 248 114. J.- F. Lyotard, (1984), Introduction: The Postmodern Condition: A Report on Knowledge, University Of Minnesota Press [1979], Minneapolis, pp. xxiv– xxv. 115. By for example J. Habermas, (1981), Modernity Versus Postmodernity, New German Critique, Issue 22, Special Issue on Modernism, pp. 3– 14 and A. Callinicos, (1991), Against Postmodernism: A Marxist Critique, Polity Press, Cambridge. 116. Z. Bauman, (2006), Liquid Times: Living in an Age of Uncertainty, Polity, Cambridge. 117. Ibid. pp. 79– 99. 118. See e.g. Z. Bauman, (2004), Work, Consumerism and the New Poor, 2nd Ed., McGraw- Hill International [1998], New York. 119. Z. Bauman, (2000), Liquid Modernity, Polity, Cambridge. 120. E.g. the 1% versus the 99% of the Occupy Wall Street Movement. 121. Z. Bauman, (2000), Liquid Modernity, Polity, Cambridge, p. 91. Notes 379

122. G. Deleuze, (2002), Postscripts on Control Societies, in T. Y. Levin, U. Frohne, and P. Weibel (eds.), CTRL, Rhetorics of Surveillance from Bentham to Big Brother, ZKM, Karlsruhe, pp. 228– 235. 123. In the context of a modern welfare state and positive freedom in particular it can be concurred with that the inequalities and income disparities highlighted for example by the Occupy Wall Street movement are essentially not much more than symptoms of a deeper cause, being the ‘inequality of (access to) opportunities’. From a welfare and positive freedom point of view that conclusion is properly problematic as it also limits future economic and social mobility (cf. M. Corak, (2013), Income Inequality, Equality of Opportunity, and Intergenerational Mobility, Journal of Economic Perspectives, Vol. 27, Issue 3, pp. 79– 102). For a recent quantification of the problem see: P. Brunori, F. H. G. Ferreira, and V. Peragine, (2013), Inequality of Opportunity, Income Inequality and Economic Mobility: Some International Comparisons, World Bank Discussion Paper Nr. 6304 (January 2013). 124. M. Maffesoli, (1996), The Time of the Tribes: The Decline of Individualism in Mass Society, Sage, London. Empirical support can be found in M. McPherson, L. Smith- Lovin, and M. E. Brashears, (2006), Social Isolation in America: Changes in Core Discussion Networks over Two Decades, American Sociological Review, Vol. 71, pp. 353– 375. 125. Bauman refers to the Fordian enterprise (i.e. Henry Ford) where capital and labor (through unions) permanently interacted and created a stable framework through a permanent relationship of co- dependence that allowed planning for the future and investment (Z. Bauman, (2006), Liquid Times: Living in an Age of Uncertainty, Polity, Cambridge, p. 84). Bianchi comments: ‘the Fordian economy has been substituted by the post- industrial economy, in which the leading products are no longer durable goods but interactive services related to information and communication, so much so that we speak of the progressive establishment of a knowledge society’ in F. Bianchi, (2010), Recent Transformation of the Italian Labour Market: Towards a Lifelong Learning System, Italian Journal of Sociology of Learning, Vol. 3, pp. 10– 40. Also Deleuze defines lifelong learning as an essential part of the control society (Ibid.) 126. E. Engelen, (2014), Hoe grootbedrijven de democratie uitwonen, www.ftm.nl, 1/19/2014. 127. In The Netherlands that still accounts still for about 70% of economic activity. 128. See for example the letter of March 24, 2014 of Unilever on behalf of many MNCs requiring, although sugar- coated, enhanced coordination in order to seek a tighter grip on public R&D funding. See also: H. van der Horst, (2014), Multinationals willen universiteiten in hun grip krijgen, May 11, Joop.nl, opin- ies, in particular the quote from the Unilever letter: ‘Verder is het van belang dat er in het financieringsmodel van publiek- private samenwerking ruimte is voor verschillende vormen van samenwerking (niet alleen op basis van cash- bijdragen van bedrijven)’. The consequence is going to be only a focus on the refinement of existing technologies, but no real advancement in fundamental research. We also observe this aspect in the public capital markets: consistently over time, the internet and related technologies are valued at higher multiples than for example fundamental medical and pharmaceutical research. This is all besides the question of whether R&D and innovation should be solely focused on the merchandisable aspect. The Netherlands spends about €11 billion on R&D (about 1.83% of GDP) in total, of which about €5 billion is spent by 380 Notes

corporations (about 0.9% of GDP), CBS dataset (2011). The trend is declining on both counts, with inter- annual variations. 129. Although short- term career development is largely determined by long- term objectives, i.e. focus on skill development versus CV building and career enhancers. An illustrative example of this is the concept developed by Korn/ Ferry in the early 2000’s of ‘learning agility’, i.e. the ability in a certain professional environment to absorb certain skills and then move on and exploit those skills in a new and different professional setting, absorb yet more new skills. That cycle repeats itself. Those professionals excel in ‘absorbing and moving on’ to a new environment are classified as ‘high potentials’ versus those who are excellent in developing a skill set and refining it during their full career, who have now become isolated in jobs outside the MNC spectrum, such as doctors. Nevertheless, the protracted focus on skills development throughout a career has led to economy- and society- wide praise for, for example, the robust engineering tradition on which the German economy is based. Although they could be considered two different types of career track, it is the macro- view in this model that is relevant, pointing to a preference from a neoliberal perspective for the agile, unattached individual who absorbs and moves on, enhancing him- or herself, but making no real contribution (unilateral dynamic) to the wider societal and economic infrastructure, versus the old industrial model in which professionals developed themselves while building a robust environment in their field, with generations building different layers of professional and technological innovation. 130. D. van Reybroek, (2013), Tegen Verkiezingen, De Bezige Bij, Antwerpen. 131. The term has existed for over a decade now but has gained importance since its use by the new King of the Netherlands in his throne speech of September 17, 2013. 132. T. Hobbes, (1982), Leviathan, Chapter VIII in Fine Regarding the Fear of Violent Death, Penguin Books [1651], New York. 133. See further: Z. Bauman, (2006), Liquid Times: Living in an Age of Uncertainty, Polity, Cambridge, pp. 125– 143. 134. R. Castel, (2003), L’insécurité Social: Qu’est- ce qu’ être protegé, Le Seuil, Paris, pp. 5– 6. 135. F. Furadi, (2005), Politics of Fear, Continuum Press, London. 136. R. Castel, (2003), L’insécurité Social: Qu’ est- ce qu’ être protegé, Le Seuil, Paris, p. 22. 137. Ibid. p. 46. 138. T. H. Marshall, (1950), Citizenship and Social Class, and Other Essays, Cambridge University Press, Cambridge, pp. 33– 45 ff. 139. Z. Bauman, (2006), Liquid Times: Living in an Age of Uncertainty, Polity, Cambridge, pp. 94– 95. 140. It is not so much the rise in the power of corporations that is problematic, but the fact that it is not accompanied by proper accountability. See further: S. George, (2014), State of Corporations: The Rise of Illegitimate Power and the Threat to Democracy, in State of Power 2014, www.tni.org. 141. See recently: J. McGeever, (2014), Why Are Corporate Profits So High? Because Wages Are So Low, Bloomberg.com, 1/24/2014. 142. Strangely enough corpocracy is not too concerned as it safeguarded its financial and economical independence. The statement of a CEO of a leading S&P 500 company in Davos during the WEF 2014 was characteristic, when he claimed that they don’t need the ‘99%’ to run a successful business in a cnbc.com Notes 381

interview. I’m sure not all CEOs agree with that statement, but it demonstrates that whoever is excluded from the neoliberal market is permanently at risk of becoming ‘economically irrelevant’. Compare: J. Dean, (2012), Is democratie nu mogelijk? Ja, en zo ziet zij eruit!, in T. Bakker and R. Brouwer (eds.), Liberticide, IJzer, Utrecht, p. 46, regarding the expropriation of capacities (craftsmanship). There is no need for a large educated middle class to serve the 1%. 143. The initial 2000– 2010 Lisbon strategy failed allegedly due to a lack of implementation targets and the ability of EU nations to set their own standards and tools for implementation within any binding commitment in terms of end-result. In 2010 a new ten- year framework (2010– 2020) was developed for ‘smart, sustainable, inclusive growth’ which combined employment, competitiveness, innovation, and environmental targets. In late January 2014, the European Union proposed an end to binding national targets for renewable energy production after 2020. Instead, it substituted an overall European goal that is likely to be much harder to enforce. It also decided against proposing laws on environmental damage and safety during the extraction of shale gas by a controversial drilling process known as fracking. It opted instead for a series of minimum principles it said it would monitor. 144. See in detail: K. Haegens, (2008), De media voorbij het neoliberalisme. Vaarwel objectiviteit, Welkom werkelijkheid, T. Bakker and B. Brouwer (eds.), Liberticide, Ijzer, Utrecht, pp. 97– 119. 145. T. Bakker and R. Brouwer (eds.), (2008), Liberticide: Kritische Reflecties op het neoliberalisme, Ijzer, Utrecht, p. 10. 146. D. Blume and L. Easley, (2002), If You’re So Smart, Why Aren’t You Rich?, (rev. 2004), Belief Selection in Complete and Incomplete Markets, Cornell University, Department of Economics, Working Paper. 147. H. Achterhuis and P. H. Steenhuis, (2013), Tegendenken, Lemniscaat, Rotterdam, pp. 104 & passim. ‘Samenredzaamheid’ refers to the ability of individuals, often in smaller communities, to co- shape their direct environments and deliver solutions for their problems characterized by robustness and longevity, far away from the scalability and fragility of the free market, where ideas are only valu- able to the extent that they contribute to immediate profitability and control of the individual consumer. Achterhuis and Steenhuis exemplify this by referring to the fact that consumers these days put more trust and faith in a global brand than in the century- old craftsmanship at the corner of the street, although that craftsmanship embodies more of what individuals aspire to. 148. I. Wallerstein, (2005), After Liberalism, The New Press, London, pp. 34– 59. 149. I. Wallerdstein, (2005), Historical Capitalism with Capitalist Civilization, Verso, New York & London, pp. 25– 65. 150. D. de Wachter, (2012), Borderline Times: Het einde van de normaliteit, Lannoo, Tielt. 151. He applies this statement to many diseases that did not exist 10– 15 years ago or were not focused on by the media as they are these days. He expects that a narrowing band of normality will lead to most, if not all, in society being classified as not- normal over time, referring to the self- defeating aspects of neoliberalism. 152. P. Verhaeghe, (2012), Identiteit, De Bezige Bij, Antwerpen. See also: P. Verhaeghe, (2012), De neoliberale waanzin: flexibel, efficiënt en gestoord, VUBPRESS, Brussel. 153. Psychological identity is always a construction based on the identification of and relation to dominant views offered by the external world, See: J. Lacan, (1966), Le tade du mirroir, Seuil, Paris. 382 Notes

154. P. Verhaeghe, (2013), De school als voorsortering van de werkplaats, Lecture 10/ 18- 19/2014. The full transcript of the lecture can be found at: www.dewereld- morgen.be. He also points to the role of the media in the shaping of identity and the visualization of role models. 155. Ibid. in fine. 156. T. Bakker and R. Brouwer (eds.), (2008), Liberticide: Kritische Reflecties op het neoliberalisme, Ijzer, Utrecht, p. 25. 157. Care becomes more expensive, although fewer professionals are employed in the sector. This is also true for automotives, education, etc. 158. T. Bakker (2008), De Gelijke Munt van het Neoliberalisme, in T. Bakker and R. Brouwer (eds.), Liberticide: Kritische Reflecties op het neoliberalisme, IJzer, Utrecht p. 34. 159. The destruction of civilization and culture was a technique also used by the Nazi’s vis- à- vis the Jewish Community. They understood that nothing was so effective in unrooting them as a community and destabilizing them than destroying their art and thus their civilization and culture. It creates the ability to ignore them as a ‘collective’, as it then appears that they no longer existed or had never existed. Like every comparison, there is a certain asymmetry. However, neoliberalism operates much more fluidly and in an elusive way, and will further always argue that a certain end- result has been self- chosen by the individual given the options he or she had available in the free market ( self- accusation). 160. R. Brouwer, (2008), Vrijheid als ideologie. Een diagnose van de neoliberale samenleving, in T. Bakker and R. Brouwer (eds.), Liberticide: Kritische Reflecties op het neoliberalisme, Ijzer, Utrecht, p. 40. 161. This is even more the case as science has been used by the free market to justify its axioms. Science as the lobbyist of the free market is a concept known as ‘deep lobbying’. The term was coined and first used by S. Clemons, (2003), in a paper called ‘The Corruption of Think Tanks’ JPRI (Japan Policy Research Institute), Critique, Vol. x, Issue 2. 162. R. Brouwer, (2008), Vrijheid als ideologie. Een diagnose van de neoliberale samenleving, in T. Bakker and R. Brouwer (eds.), Liberticide: Kritische Reflecties op het neoliberalisme, Ijzer, Utrecht, pp. 42– 43. The distinction between populist (commercial) and intellectual (engaged) has been removed. 163. The Arab Spring had less clout in reality than in its online version. One could consider this phenomenon a ‘pump and dump’ – a mechanism of neoliberalism and the media as its enabler. Rather than consistent attention, trends temporar- ily receive a disproportionate amount of attention and then often ‘fully’ disappear. The free market does not tolerate a quasi- permanent source of attention geared towards something other than itself. Also the enablers will disappear or reinvent themselves. Facebook et al. will no longer be the same interface model ten years from now. It will only continue to exist if it can justify its existence vis- à- vis the free market and contribute to its existence – hence the focus on mobile applications, online advertising, Instagram (the neoliberal individual promoting itself), etc. 164. R. Brouwer, (2008), Vrijheid als ideologie. Een diagnose van de neoliberale samenleving, in T. Bakker and R. Brouwer (eds.), Liberticide: Kritische Reflecties op het neoliberalisme, Ijzer, Utrecht, p. 52. 165. The individual is told what fashion to like, what opinions to validate, and how to feel about global problems, and is being told that the functioning of the Notes 383

free market will ultimately always correspond to the highest level of aggregate prosperity. 166. See for example: ‘Vertrouwen in de buurt’, Wetenschappelijke raad voor het regeringsbeleid, Nr. 72, April 2005, University Press Amsterdam, Amsterdam regarding security and quality of life. 167. R. Brouwer, (2008), Vrijheid als ideologie. Een diagnose van de neoliberale samenleving, in T. Bakker and R. Brouwer (eds.), Liberticide: Kritische Reflecties op het neoliberalisme, Ijzer, Utrecht, p. 54 exemplifies: ‘hippy culture commercial- ized, luxurious dinners and TV shows for good causes’ etc. 168. F. Guattari and G. Deleuze, (1972), Capitalisme et schizophrénie, I, L’ Anti- Œdipe, Editions de Minuit, Paris. 169. W. Kullmann, (1980), Der Mensch als politisches Lebewesen bei Aristoteles, Hermes, Vol. 108, pp. 419– 443. (English translation: ‘Man as a political animal in Aristotle’ in D. Key and F. Miller (eds.), (1991), A Companion to Aristotle’s Politics, Blackwell, London, pp. 94– 117. 170. K. Mannheim, (1995), Ideologie und Utopie, 8th Ed., Klostermann, [1966], Frankfurt. 171. For instance, in a primitive form barter communities are leading the way. Meaningful dynamics, however, will always be characterized by an enhanced level of institutionalization. 172. P. Bourdieu, (1998), Acts of Resistance. Against the New Myths of Our Time, trans. R. Nice, Cambridge, Polity Press, pp. viii: Neoliberalism controls society hori- zontally, not in a top- down fashion but through narrowing the band of opinions through media focus. Similar dynamics can be found in entrepreneurship. Entrepreneurship is also on the decline, as it requires individuals who try to change reality as it is. Increased aligned media exposure leaves little room for adverse- thinking individuals. See also: A. Dilts, (2011), From ‘Entrepreneur of the Self’, to ‘Care of the Self’ Neoliberal Governmentality and Foucault’s Ethics, Foucault Studies, Vol. 12 (October 2011), pp. 130– 146. K. Komulainen, P. Naskali, M. Korhonen, and S. Keskitalo- Foley, (2009), Internal Entrepreneurship – a Trojan Horse of the Neoliberal Governance of Education? Finnish Pre- and In- Service Teachers’ implementation of and Resistance Towards Entrepreneurship Education, Journal for Critical Education Policy Studies, Vol. 9, Issue 1, pp. 342– 373. 173. A. Kleinknecht, R. Naastepad, and S. Storm, (2006), Overdaad schaadt: meer management, minder productiviteitsgroei, ESB, September, Vol. 206, pp. 437– 440. 174. ‘Job’ versus ‘profession’. 175. The high productivity in the USA is driven by ICT innovation and not by productivity growth in the old industries, which still account largely for the macro- numbers; A. Kleinknecht, R. Naastepad, and S. Storm, (2006), Overdaad schaadt: meer management, minder productiviteitsgroei, ESB, September, Vol. 206, pp. 438– 439. 176. See in extenso: P. Bourdieu, (1998), Acts of Resistance. Against the New Myths of Our Time, trans. R. Nice, Polity Press, Cambridge, pp. 94– 96. 177. M. Foucault, (1977), Preface, in F. Guatarri and G. Deleuze (eds.), Anti- Oedipus: Capitalism and Schizofrenia, University of Minneapolis Press, Minneapolis, pp. xi– xiv; M. Foucault, (1975), Surveiller et punir, Éditions Gallimard, Paris. 178. B. Hofmeyr (2008), Het neoliberalisme: de distopische werkelijkheid van een utopie, in T. Bakker and B. Brouwer (eds.), Liberticide: Kritische Reflecties op het neoliberalisme, Ijzer, Utrecht, pp. 138– 159 in particular p. 141; P. Bourdieu, 384 Notes

(1998), Acts of Resistance. Against the New Myths of Our Time, trans. R. Nice, Polity Press, Cambridge, pp. 97– 99. 179. B. Brown, (2003), Neoliberalism and the End of Liberal Democracy, Theory & Event, Vol. 7, Issue 1, pp. 1– 25; S. Springer, (2012), Neoliberalism as Discourse: Between Foucauldian Political Economy and Marxian Poststructuralism, Critical Discourse Studies, Vol. 9, Issue 2, May 2012, pp. 133– 147. 180. T. Lemke, (2001), The Birth of Bio- Politics: Michel Foucault’s Lecture at the Collège de France on Neo- Governmentality, Economy and Society, Vol. 30, Issue 2, p. 191. 181. M. Foucault, (1988), The Political Technologies of Individuals, in L. H. Martin, H. Gutman, and P. H. Hutton, (eds.), [1982], Technologies of the Self: A Seminar with Michel Foucault, Tavistock, London, p. 159. 182. T. Lemke, (2001), The Birth of Bio- Politics: Michel Foucault’s Lecture at the Collège de France on Neo- Governmentality, Economy and Society, Vol. 30, Issue 2, p. 200. 183. B. Hofmeyr (2008), Het neoliberalisme: de distopische werkelijkheid van een utopie, in T. Bakker and B. Brouwer (eds.), Liberticide: Kritische Reflecties op het neoliberalisme, Ijzer, Utrecht, p. 148. 184. M. Hardt and A. Negri, (2001), Empire, Harvard University Press, Cambridge, MA, p. 478. In their book ‘Multitude’ in 2005 they argue that the individual as the smallest singularity in this global network is able to fight neoliberalism from within (cf. M. Foucault). M. Hardt and A. Negri, (2005), Multitude: War and Democracy in the Age of Empire, Penguin Books, New York, p. 448. 185. Compare W. Schinkel, (2012), De nieuwe democratie: Naar andere vormen van politiek, De Bezige Bij, Amsterdam, in particular pp. 263– 285. 186. M. Foucault, (1986), The Subject and Power, in H. L. Dreyfus and P. Rabinow (eds.), Michel Foucault, Between Structuralism and Hermeneutics, The Harvester Press Ltd. [1982], Sussex, pp. 213– 216. 187. P. Bourdieu, (1998), Acts of Resistance: Against the New Myths of Our Time, trans. R. Nice, Cambridge, Polity Press, pp. 104– 105. 188. B. Brown, (2003), Neoliberalism and the End of Liberal Democracy, Theory & Event, Vol. 7, Issue 1, p. 25. 189. I create the conditions for the freedom of someone else by restricting my freedom and somebody else does the same to ensure my freedom rights. 190. Kant defined ‘freedom’ as rational distance vis- à- vis nature. See: R. Hanna and A. W. Moore, (2007), Reason, Freedom and Kant: An Exchange, Kantian Review, Vol. 12, pp. 113– 133. The rationality concept, including self- reflection, is now covered in and associated with ‘morality’, which is a hazard in the search for absolute freedom. 191. Which is an application of the neoliberal ‘dog- eat- dog’ principle, i.e. humans as perpetual adversaries, even if that implies harming each other physically or mentally. 192. The implication of non- conformism is being ‘disliked’ and/or being barred from the site. 193. J. P. Sartre, (2007), Existentialism is a Humanism, trans. C. Macomber, Yale University Press [1946], New Haven, p. 27. 194. Herding by humans allows the marketing industry to promote products endorsed by others, i.e. the decision about what to accept from the free market is determined by ‘the others’. 195. This refers to the ‘end of mankind’ in M. Houellebecq, (1999), Elementaire deeltjes, De Arbeiderspers, Amsterdam. Notes 385

196. T. Bakker and R. Brouwer (eds.), (2012), Vrijheid als nieuwe religie, IJzer, Utrecht, p. 30. 197. M. Horkheimer and T. W. Adorno, (2004), Dialektik der Aufklärung, Fischer [1949], Frankfurt. 198. J. Dean, (2012), Is democratie nu mogelijk? Ja, en zo ziet zij eruit!, in T. Bakker and R. Brouwer (eds.), Liberticide IJzer, Utrecht, p. 34. 199. Ibid. p. 35. 200. Ibid. pp. 42– 50. 201. T. Bakker, (2012), De verslaafde liberale slavenmoraal, in T. Bakker and R. Brouwer (eds.), Liberticide, IJzer, Utrecht, p. 55. D. Graeber, Debt: The First 5,000 Years, Melville House, Brooklyn, Reprint, pp. 33– 57. Mesopotamian people who could not pay off their debts became slaves of their creditors. 202. N. Ashraf, C. F. Camerer, and G. Loewenstein, (2005), Adam Smith: Behavioral Economist, Journal of Economic Perspectives, Vol. 19, Issue 3, Summer 2005, pp. 131– 145. A. Smith, (2013), The Theory of Moral Sentiments, Economic Classics, [1759], New York, Chapter I, pp. 1– 55. 203. J. S. Mill, (2013), On Liberty, Paragon Books [1859], Bath, pp. 35– 59. 204. Compare: J. J. Rousseau, (2012), Du Contrat Social, Flammarion [1762], Paris, Intro Chapter 1: ‘L’homme est né librement, mais il se retrouve déjà dans les chaînes’. 205. Considered the originator of economic liberalism and referred to as such throughout later works, including those of F. A. Hayek, but very explicit in his ‘Lectures of a Mastermind’, (1967), British Academy. 206. Bernard de Mandeville, (2012), La Fable Des Abeilles, Ou, Les Fripons Devenus Honnestes Gens: Avec Le Commentaire, Où L’on Prouve Que Les Vices Des Particuliers Tendent Á L’avantage Du Public, édition 1723, Ulan Press [1705], Paris, p. 34; Also B. de Mandeville, (1989), The Fable of the Bees, Penguin Classics, New York. 207. ‘Le Capitalisme libidinal veut faire de nous des drogués’ (D.- R. Dufour, infra). 208. ‘De l’égoïsme moutonnier à l’indiviualisme éclairé’ (D.- R. Dufour, infra). 209. Initially in D.- R. Dufour, (2012), La Cité Perverse, Denoël [2009], Paris and later on more broadly as an infrastructural characteristic of liberalism D.- R. Dufour, (2012), L’individu qui vient… après le libéralisme, Denoël, Paris and [2011], Il était une fois le dernier homme, Denoël, Paris. 210. Ad Verbrugge, (2004), Tijd van onbehagen, Filosofische essays over een cultuur op drift, SUN, Nijmegen. 211. K. van Egmond, (2010), Een vorm van beschaving, Christofoor, Zeist, pp. 25– 54, who sees the next step as the ‘spiritual- individual- subjective’ phase, which in contrast to the current nihilism will rely on values and ‘meaningfulness’ through heterogeneous diversity. In this line of thinking there is no room to evaluate the dynamics of capitalism on this Hegelian evolution of the view on mankind and the world. It presupposes ideology- neutrality and a valueless development of objective knowledge. 212. J. Gray, (2007), Straw Dogs, Farrar, Straus & Giroux, New York, p. 110. 213. S. Freud, (1990), Group Psychology and the Analysis of the Ego, W. W. Norton & Company [1959], New York. 214. Causing all sorts of psychological complications; see: P. Verhaeghe, (2012), De neoliberale waanzin: flexibel, efficiënt en gestoord, VUBPRESS, Brussel; i.e. psychological and social entropy – see P. Lemmens, (2012), Reclaiming the Mind: Het neoliberalisme als voltooid nihilisme en de noodzaak een nieuwe cultuur van de geest uit te vinden, in T. Bakker and R. Bouwer (eds.), Liberticide, IJzer, Utrecht, p. 108. The mind is negentropic anti- adaptionist in nature, as its role is to reflect, object, and develop alternatives. 386 Notes

215. P. Lemmens, (2012), Reclaiming the Mind: Het neoliberalisme als voltooid nihilisme en de noodzaak een nieuwe cultuur van de geest uit te vinden, T. Bakker and R. Bouwer (eds.), Liberticide, IJzer, Utrecht, p. 103. 216. B. Stiegler, (2006), La télécratie contra la démocratie. Lettres ouvertes aux répresent- antes politiques, Flammarion, Paris, pp. 20– 40. 217. P. Dardot and C. Laval, (2009), La nouvelle raison du monde: Essay sur la société néolibérale, La Découverte, Paris. 218. Hence the fact that neoliberalism and laissez- faire liberalism are incompatible and in fact quite the opposite (see in depth Chapter 1), evidencing not the retreat of the state but the massive organic growth of the state under neoliberalism. 219. This aspect is a precursor that refers to a painful divide which will become very obvious in the field of taxation in Chapter 4. The sovereign requires its citizens and corporations active in its territory to pay its taxes faithfully, but competes with tax incentives on the global state. 220. Subjected to the financial markets. 221. M. Lazzarato, (2009), Neoliberalism in Action: Inequality, Insecurity and the Reconstitution of the Social, Theory, Culture and Society, Vol. 26, Issue 6, pp. 109– 133. 222. This occurred as early as the beginning of the 20th century, but accelerated when the termination of the Bretton Woods agreements disconnected the supply of money from state- owned gold reserves (1971– 1973). B. Stiegler, (2001), La Technique et le temps 3. Le temps du cinéma et la question du mal- être, Galilée, Paris, p. 144. 223. B. Stiegler, (2009), Acting Out, Stanford University Press, Stanford, p. 60; B. Stiegler, (2010), Taking Care of Youth and the Generations, Stanford University Press, Stanford, passim. 224. B. Stiegler, (2005), Constituer L’Europe, 2. Le motif Européen, Galilée, Paris, p. 98. 225. P. Lemmens, (2012), Reclaiming the Mind: Het neoliberalisme als voltooid nihilisme en de noodzaak een nieuwe cultuur van de geest uit te vinden, in T. Bakker and R. Bouwer (eds.), Liberticide, IJzer, Utrecht, p. 107. 226. D.- R. Dufour, (2008), The Art of Shrinking Heads: On the New Servitude of the Liberated in the Age of Total Capitalism, Polity, London, p. 6. Dufour refers to the liquidation of both the modern subject in the Kantian way – the subject of critique – and the Freudian neurotic guilt- driven way. 227. ‘Be operational (that is, commensurable), or disappear: In J. F. Lyotard, (1984), The Postmodern Condition, A Report on Knowledge, [1979], University of Minnesota Press, Minneapolis, p. xxiv. 228. B. Stiegler and Ars Industrialis, (2006), Réenchanter le monde. La valeur esprit contre le populisme industriel, Flammarion, Paris, p. 116. 229. Also: M. Foucault, (1966), Les mots et les choses, Gallimard, Paris, p. 322 ‘La con- séquence essentielle, c’est que le langage classique comme discours commun de la représentation et des choses, comme lieu à l’intérieur duquel nature et nature humaine s’entrecroisent, exclut absolument quelque chose qui serait ‘science de l’homme’’. 230. Ibid. p. 323. He envisages ‘human as a knowledge- creating subject’, the individual as a source of ‘objective’ knowledge. 231. B. Stiegler, (2004), Mécréance et discrédit 1. La décadence des démocraties industri- elles, Galilée, Paris, pp. 104 and 147. 232. J. Rifkin, (2000), The Age of Access: The New Culture of Hypercapitalization Where All of Life is a Paid- For Experience, Tarcher Putnam, New York, pp. 7– 8. Notes 387

233. M. Heidegger, (2006), Sein und Zeit, Max Niemayer Verlag [1927], Tübingen, p. 151, passim. 234. 19th century capitalism injected know- how (savoir faire) into equipment and reduce the individual to a work- producing tool and 20th century capitalism has reduced the individual’s life to consumerism and disconnected the subject from its ‘savoir vivre’ and reduced the individual to merchandize: See. P. Lemmens, (2012), Reclaiming the Mind: Het neoliberalisme als voltooid nihilisme en de noodzaak een nieuwe cultuur van de geest uit te vinden, in T. Bakker and R. Bouwer (eds.), Liberticide, IJzer, Utrecht, pp. 110– 111. Avant la letter: A. Smith, (2000), The Wealth of Nations, Books IV– V, Penguin [1776], London, pp. 368– 369 about the destabilizing effect of proletarization on the mind. 235. Even ‘knowledge workers’ are increasingly subject to routine protocols and procedures (cf. P. Drucker, (2008), The Essential Drucker: The Best of Sixty Years of Peter Drucker’s Essential Writings on Management, HarperBusiness [1959], New York). 236. The value of things is reduced to its monetary expression (cf. Death of God, F. Nietsche). The neoliberal human is ‘the last human’. 237. ‘du temps de cerveau disponible’ Patrick Le Lay (2004). 238. B. Stiegler, (2009), Acting Out, Stanford University Press, Stanford, p. 82. Pharnaka is the concept coined by Stiegler using the Communication and ICT networks and platform to create psychic and collective co- individualization (cf. Gilbert Simondon, (1989), L’individuation Psychique et Collective, Aubier- Montaigne, Paris) as they are ambivalent, i.e. having the ability to sublimate or de- sublimate. The ‘pharmacopeia’ we will use in the following chapter to evaluate the role of Pigovian taxes in a globalizing world and the assessment of capitalism using its own artillery. 239. ‘Creative destruction’ (‘schöpferische Zerstörung’) is a term coined by J. Schumpeter in his book [1942] Capitalism, Socialism and Democracy (London (1994), Routledge, p. 139), although the term initially was implied by W. Sombart in his 1913 work ‘War and Capitalism’ (‘Krieg und Kapitalismus’, Düncker & Humblot, München, p. 207) and refers to the permanent business cycles and the continuous evolution and innovation in market- based economies when he indicates ‘Wiederum aber steigt aus der Zerstörung neuer schöp- ferischer Geist empor’. That line of thinking started with Marx and Engels, who had already highlighted that ‘capitalism destroys and reconfigures previous economic orders’ (K. Marx and F. Engels (2002), The Communist Manifesto, trans. S. Moore, Penguin Books [1848], Harmondsworth, p. 226. 240. B. Stiegler, (2010), Ars Industrialis Manifest, 1., 4th paragraph, http://arsindustrialis. org/ manifesto- 2010. 241. B. Stiegler, (2010), Ars Industrialis Manifesto, 2., 3rd paragraph. 242. ‘Not that long ago society was structured along the lines of at least four different fields, the political, religious, economic, and cultural fields with the political and religious ones the two dominant. Today these spheres of influence all seemed to have disappeared. Politicians are just material for comedians, we do well not to mention religion and everyone is an artist. There’s only one dominant discourse left and that’s the economic one.’ P. Verhaeghe (2011), De neoliberale waanzin. Flexibel, efficiënt en … gestoord, Paul Verbraeklezing 2012, VUBPRESS, Brussel, p. 39. 243. B. Stiegler (2010), Ars Industrialis Manifesto, 2., 4th paragraph. 244. Z. Bauman, (1999), In Search of Politics, Stanford University Press, Stanford, p. 34. P. Verhaeghe illustrates: ‘We are free in the sense that we can spit on religion (watch out with Islam and Judaism), sexually we are expected to try 388 Notes

just about everything what was previously prohibited, and we can adhere to any political movement we want. That’s because none of this matters’. In P. Verhaeghe, (2011), De neoliberale waanzin. Flexibel, efficiënt en…gestoord, Paul Verbraeklezing 2012, VUBPRESS, Brussel, p. 39. 245. To realize (the potential) that is imminently already available. P. Verhaeghe refers to ‘vocavis servos suos’ in Ibid. p. 39, indicating that freedom is linked (in fact subject to the condition of) to self- realization in the neoliberal society. 246. As it is very much unclear if it truly is more effective and efficient. The neoliberal era is characterized by lower economic growth and larger social disparities: see H. Achterhuis, (2010), De utopie van de vrije markt, Lemniscaat, Rotterdam, pp. 296– 297. 247. A. MacIntyre, (2007), After Virtue, University of Notre Dame Press, Notre Dame, Indiana [1981], in particular Chapter 18. 248. Which translates in practice invariably into ‘short term gains or profits’. 249. Duties in labor relations also no longer matter, or only to the extent that they contribute to short- term success or gains. Job- hopping etc. is illustrative of that behavior. Refer to the discussion in this chapter of how craftsmanship has become lost through this dynamic. See also: J. Blommaert, P. Mutsaers, and H. Siebers, (2012), De 360° werknemer. De nieuwe arbeidscultuur En de eindeloze concurrentie, Berchem, Epo. See also: Bart Staes, (2012), De onzichtbare hand die ons wurgt, www.bartstaes.com, unpublished. 250. This will be referred back to in the discussion about the position of taxes in a neoliberal state later on in this chapter. 251. B. Stiegler (2010), Ars Industrialis Manifesto, par. 4.3. 252. He indicates: ‘public power has renounced intervening in economic and industrial life, and renounced regulating the speculative tendency of capital. This means that it has totally failed to assume what is its role par excellence, namely: encouraging the development of what, in technics in general, and in mnemotechnics in particular, leads to the reinforcement of society – to make of technical becoming a social future intensifying processes of individuation by inventing forms of life, that is, of savoir- vivre – and thus to struggle against the destructive, atomising and uncivil effects which every pharmakon also and always brings with it’. (4.6) 253. Ibid. par. 4.7. 254. H. Welzer, (2013), Selbst denken: Eine Anleitung zum Widerstand, Frankfurt am Main, S. Fisher Verlag, in particular, pp. 120– 189. 255. B. Stiegler, (2010), Ars Industrialis Manifesto, ‘a new industrial economy founded on care – where this is clearly not merely a matter of adapting the obsolete model to a “green” consumerism: it is a matter of inventing a new savoir- vivre’ 5. par. 10) 256. See Chapter 4. 257. B. Stiegler, (2010), Ars Industrialis Manifesto, in this respect comments: ‘Industrial and collective, scientific and civic, political and economic, responsibility is to project the conditions for a passage from a system which was founded on “disapprenticeship,” that is, the destruction of savoir- faire, the destruction of savoir- vivre, and the systematic destruction of theoretical and critical knowledge itself, that is, founded on a systemic stupidity (this is what the Madoff affair signifies), to a system founded on the development (le développement et la mise en valeur) of all types of capabilities, that is, of all forms of knowledge ( savoir- faire, savoir- vivre, theoretical knowledge).’ He refers to the need to re- learn what we forgot and the way it will change our view on our resources (and the way we use them), our ability to model our future Notes 389

and the type of society we want to live in. An optimal future tax system will be instrumental in achieving those objectives. In Chapter 4, it will be evidenced that those objectives cannot be achieved through ‘income’ or ‘source’- based tax models and that a future ‘Pigovian’ model cannot even co- exist with a traditional ‘source’- based model. Stiegler also explains what caused us to de- learn our ‘savoir vivre’: ‘We call proletarianization the process through which an individual or collective knowledge, being formalized through a technique, a machine, or an apparatus, can escape the individual – who thus loses this knowledge which was until then his knowledge. The first definitions of proletarianization, emerging from the analyses of Smith as well as Marx, made clear that pauperization results in the first place from the loss of savoir- faire of workers enslaved to machines, and no longer masters of their tools (craftsmen).’ (6, 1st par.) 258. ‘We must cease considering regional development as a process of redistribution, and rethink it as an ensemble of policies encouraging the creation of resources and new wealth. This seems banal, but it’s a Copernican revolution.’ Pierre Veltz, (1994), Du territories pour apprendre et innover, Aube, Paris, p. 5. ‘The economic development of regions, like development in general, passes today through the density and quality of the mesh of networks between actors’ (ibid., p. 8). ‘This more and more open economy is also a more and more “relational’ economy” ’ (p. 9). ‘The first asset of regions, the decisive asset, will be their capacities for intra- and extra- regional cooperation’ (p. 10). 259. P. Jorion, (2008), L’implosion: La finance contre l’Économie, Éditions Fayard, Paris, p. 322. 260. F. Lordon, (2009), La crise de trop, Reconstruction d’un monde faille, Éditions Fayard, Paris, p. 90 who indicates that the neoliberal society has outsourced the ‘public good’ (i.e. stewardship of public and private savings and stability of the financial infrastructure) of both private and public financial transactions (i.e. society as a whole) to private agents. 261. P. Verhaeghe provides some examples of how this has become intrinsically inter- woven with our mentality in society. For example, he refers to the fact that highly educated women who preferred to stay housewives once the children were born are considered ‘sad’; those people who dedicate their life to science at universities, where competencies and financial reward are not in line with each other, at least compared to a similar situation in the free market, are ‘losers’. 262. J.- L. Nancy, (1993), The Experience of Freedom, Stanford University Press, Stanford, p. 66. 263. J.- L. Nancy and J. C. Bailly, (1991), La comparution, Christian Bourgeois editeur, Paris. 264. E. Balibar, (1994), Masses, Classes, Ideas: Studies on Politics and Philosophies Before and After Marx, Routledge, New York, p. 47. 265. Ibid. p. 49. 266. J. Butler, (2009), Frames of War: When is Life Grievable?, Verso, London/New York. 267. Who I am responsible for does not raise the question about identification, but about shaping the world around us, of which others are part. See also J. Butler (2009), Antigone’s Claim: A Conversation with Judith Butler, Theory & Event, Vol. 12, Issue 1, The John Hopkins University Press, Baltimore. 268. A large role is earmarked for education, as there is an essential difference between ‘educate in freedom’ and ‘educate to be free’. See: S. Siekelinck, (2012), Gekelderde vrijheid, in T. Bakker and R. Brouwer (eds.), Vrijheid. Maar voor wie?, IJzer, Utrecht, pp. 178– 191. 390 Notes

269. Discipline not in the sense of a power hierarchy or abuse of power, but self- inflicted discipline that creates the ability to shape one’s life, follow and chase ideals, and construct the life the individual defines for him/herself without external market impulses. Discipline as isolation, shielded against external impulses, builds an individual perspective on one’s life and shapes the authority needed to pursue one’s own ambitions and goals and commit accordingly. 270. See further: F. Furedi, (2006), Where Have all the Intellectuals Gone?, Continuum Press, London. We seem to be left now with only facile pundits, think- tank apol- ogists, and spin doctors. See also and A. Bloom, (2012), Closing of the American Mind, Simon and Schuster, New York and A. Finkielkraut, (1989), La défaite de la pensée, Gallimard, Paris. 271. He continues to make explicit the context of his statement when declaring: ‘Of course no society can survive without the workings of authoritative institutions that can maintain order and social coordination within which individuals can pursue their objectives. However in the absence of a positive narrative of authority we seek to bypass the problem of authority through compensating for it through rule making, inventing procedures and micro- managing personal life. This leads to attempt to formalise everyday life through the artificial production of rules and conventions. The conventionalisation of social life attempts to regulate personal behaviour through appealing to the authority of the expert and professional. However, when institutions rely on formal processes such as codes of conduct and transparency, they can rarely act authoritatively since these rules are not based on an explicit moral and philosophical system of meaning. That is why rule- making inexorably leads to more rule- making. The less western culture can affirm authority, the more dependent it becomes on the formalising and professionalising of daily life. The erosion of authority and autonomy is thus a mutually reinforcing process. ‘F. Furedi, (2009), Why is Authority Always a Problem?, Thomas Morus Lecture 2009, Soeterbeeck Program, Radbout Universiteit Nijmegen, www.ru.nl. 272. See about the role of education, which he argues is supposed to be characterized by its lack of interest in an ulterior purpose. Education regards the transmission of cultural and intellectual achievements of humanity to children as its defining mission; see F. Furadi, (2009), Wasted: Why Education isn’t Educating, Continuum Press, London, pp. 6– 21, passim. 273. F. Furedi, (2013), Authority: A Sociological History, Cambridge University Press, Cambridge. The modern world has attempted to develop new foundations for authority – democratic consent, public opinion, science – yet Furedi shows that this problem has remained unresolved, arguing that today the authority of authority is questioned, leading to the familiar contemporary problems of mistrust and the loss of legitimacy of many institutions. 274. Being intolerant includes a moral condemnation. 275. F. Furadi, (2011), On Tolerance: In Defense of Moral Independence, Continuum Press, London, pp. 76– 78, passim. 276. F. Winkens (2012), Het neoliberalisme van links and de actualiteit van 68, T. Bakker and R. Brouwer (eds.), Liberticide, IJzer, Utrecht, p. 198. 277. J. Rancière, (2009), Et tant pis pour les gens fatigués, Éditions Amsterdam, Paris, p. 587. 278. Political equality does not equal or guarantee civil equality. 279. J. Rancière, (1995), La Mésentente. Politique et Philosophie, Galilée, Paris, p. 157. 280. That is also the fundamental reason why neoliberalism has not been removed to the ideological bin of history, although it has extensively failed to deliver Notes 391

on its promise (just like Communism). See further C. Crouch, (2011), The Strange Non- death of Neo- Liberalism, Polity, Cambridge; G. Duménil and D. Lévy, (2013), The Crisis of Neoliberalism, Harvard University Press, Cambridge, MA. They argue that neoliberalism is not a collection of theories meant to improve the economy. Instead, it should be understood as a class strategy designed to redistribute wealth upward toward an increasingly narrow fraction of people; P. Mirowski, (2013), Never Let a Serious Crisis go to Waste: How Neoliberalism survived the Financial Meltdown, Verso, New York; D. Cahill, L. Edwards, and F. Stillwell (eds.), (2014), Neoliberalism: Beyond the Free Market, Edward Elgar Publishing Inc., Cheltenham, in particular Part Two. 281. J. Rancière, (2006), Hatred of Democracy, Verso, London & New York, passim. 282. D. Harvey, (2007), A Brief History of Neoliberalism, Oxford University Press, Oxford, p. 37. 283. Plato in his ‘Laws’ (2005, Penguin Books) identified seven grounds (archê) to legitimize power. Out of those seven, only the last ‘co- incidence’ is essentially without ground (an- archic). Rancière uses this ground to develop his concept of democracy (infra). 284. E.g. an argument/evidence based on economic success is more legitimized under neoliberalism that an argument based on objective or real life experience. See R. Janssen, (2012), Bevrijding uit de neoliberale overheersing. Democratie als praktijk van gelijkheid en vrijheid bij, in J. Rancière, T. Bakker, and R. Brouwer (eds.), Liberticide, Ijzer, Utrecht, pp. 232– 251. 285. J. Rancière, (2006), Hatred of Democracy, Verso, London & New York, pp. 55 and 73. 286. Emancipation is derived from the Roman practice of being freed from the power relation of the pater familias. ‘Ex’ and ‘mancipium’ (giving away of ownership (by the pater familias)) in C. Bingham and C. Biesta, (2010), Jacques Rancière, Education, Truth, Emancipation, Continuum, London, p. 27. 287. J. Rancière, (1999), Disagreement: Politics and Philosophy, University of Minnesota Press, Minneapolis, pp. 43– 60. 288. H. Achterhuis and P. H. Steenhuis, (2013), Tegendenken, Lemniscaat, Rotterdam, pp. 104, passim. 289. T. Decreus, (2013), Een paradijs waait uit de storm. Over macht, democratie en verzet, EPO, Antwerpen. 290. C. Mouffe, (2005), On the Political, Verso, London & New York; T. Decreus and M. Lievens, (2011), Hegemony and the Radicalisation of Democracy: An Interview with Chantal Mouffe, Tijdschrift voor Filosofie, Vol. 73, Issue 4, pp. 677– 699. 291. On this point he conflicts with the views of the German legal philosopher C. Schmitt, (2001), Het begrip politiek, Boom/Paressia, Amsterdam. 292. Many leaders, for example in the Arab Spring or more recently Ukraine, mis- judged the response coming from society. Rather than some political maneuvers and shenanigans, the ‘demos’ also here required participation in an effectively and structurally different political system. 293. J. Rancière, (1992), Politics, Identification and Subjectivization, in October, Vol. 61, pp. 58– 64. 294. F. Hayek (2007), The Road to Serfdom, Routledge and the University of Chicago Press [1949], Chicago, pp. 91 ff. That idea was re- echoed by M. Friedman, (2002), Capitalism and Freedom, The University of Chicago Press, Chicago. 295. See extensively A. Giddens, (1994), Beyond Left and Right, Polity Press, Cambridge and A. Giddens, (1998), The Third Way, Polity Press, Cambridge. 296. F. Hayek (2007), The Road to Serfdom, Routledge and the University of Chicago Press [1949], Chicago, p. 95. 392 Notes

297. A. Kenis and M. Lievens, (2012), De mythe van de groene economie, EPO, Antwerpen, p. 70. 298. L. Wacquant, (2006), Straf de armen. Het nieuwe beleid van de sociale zekerheid, EPO, Antwerpen en B. Lleshi, (2014), De neoliberale strafstaat, EPO, Antwerpen. 299. This global sovereignty is what Negri and Hardt call ‘Empire’ in A. Negri and M. Hardt, (2000), Empire, Van Gennip, Amsterdam, pp. 11– 12. 300. Countless new apps, whereas fundamental research often gets skewed at universities and research centers. 301. T. Decreus, (2013), Een paradijs waait uit de storm. Over macht, democratie en verzet, EPO, Antwerpen, p. 61. He argues that democracy assumes effective equal power for all individuals and the fact that democracy is undeniably linked to ‘autonomy’. We can recognize Rancière’s line of thinking here. 302. Something that was already acknowledged by J.- J. Rousseau, (2003), Vertoog over ongelijkheid, Boom, Amsterdam. 303. K. Marx, (2010), Het Kapitaal: Kritiek van de politieke economie, Boom [1867], Amsterdam, pp. 671 ff. 304. B. van Apeldoorn, (2011), De Macht van het kapitaal, S&D, Vol. 7, Issue 8, pp. 165– 175. 305. Left- wing politicians therefore aim to create that ‘equality’ not only in the public sphere but also in the private, as the latter is a sine qua non for the optimal functioning of the former. 306. The so- called ‘ovarian lottery’. 307. See in detail: E. M. Wood, (1995), Democracy Against Capitalism: Renewing Historical Materialism, Cambridge University Press, Cambridge, pp. 224 ff.; B. Manin, (1997), The Principles of Representative Government, Cambridge University Press, Cambridge. 308. J.- J. Rousseau, (1995), Het maatschappelijk verdrag, Boom, Amsterdam- Meppel [1762], p. 102. Even A. de Tocqueville indicated that, although a proponent of democratic institutions, he ‘feared the crowds’ in D. Bensaïd, (2010), Permanent Scandal, in G. Agamben, A. Badiou, D. Bensaid, W. Brown, N. Jean- Luc, J. Ranciere, K. Ross, and S. Zizek (eds.), Democracy in What State, Columbia University Press, New York, p. 17. 309. T. Decreus, (2013), Een paradijs waait uit de storm: Over macht, democratie en verzet, EPO, Antwerpen, p. 107. He, in line with Rancière, advocates a new model for democracy, although conceptually not as extreme referring to W. Benjamin’s (2009), Zur Kritik der Gewalt und andere Aufsätze, Suhrkamp [1921], Frankfurt (‘rechtsscheppend geweld’); Ibid. pp. 111– 117 and 135 ff. He warns about utopian constructivism (‘Yes, we can’) which would imply that democracy cannot emerge or exist on a natural standing, but needs another force, Ibid. pp. 125 ff. Compare with Ranciére (supra). 310. Conflict (cf. C. Mouffe, supra); M. Abensour, (2011), Democracy against the State. Marx and the Machiavellian Movement, Polity Press, Cambridge, pp. 102– 125. T. Decreus, (2013), Network. De (On)mogelijkheid van Verzet. Ethische Perspectieven, Nieuwsbrief van het Overlegcentrum voor Ethiek, Vol. 23, Issue 3, pp. 266– 274. 311. See also H. Lindahl, (2010), A- legality: Post- Nationalism and the Question of Legal Boundaries, The Modern Law Review, Vol. 73, pp. 30– 56; T. Decreus, (2013), Beyond Representation? A Critique of the Concept of the Referent, Representation, Vol. 49, Issue 1.3, pp. 3– 43. See in a global context H. Lindahl, (2013), Fault Lines of Globalization: Legal Order and the Fault Lines of A- Legality, Notes 393

Oxford University Press, Oxford. Lidahl developed a five- stage model explaining the emergence of A- legality in a context of globalization. 312. T. Decreus, (2013), Beyond Representation? A Critique of the Concept of the Referent, Representation, Vol. 49, Issue 1.3, pp. 138– 139. See also T. Decreus, (2014), Towards an Integrated Theory of Political Representation: A Reconceptualization of Political Representation as ‘Vertretung’ and ‘Darstellung’ (Diss.), KULeuven, Hoger Instituut voor de Wijbegeerte. 313. He adds two more models: ‘According to the first, broad conception, actions are rational if they are based on good reasons, which are further qualified as well- informed beliefs and autonomous preferences. According to the second, expressive conception, actions, beliefs and preferences are rational if they express the things people care about. The latter requires that people can reflect upon and identify with their reasons, which implies a capacity to reflect upon and distance themselves from their own bundle of preferences’, In B. Engelen, (2008), Rationality and Institutions; On the Normative Implications of Rational Choice Theory, VDM Verlag, Saarbrucken, Part 1. 314. Ibid. Part 4. 315. B. Engelen, (2008), Rationality and Institutions: An Inquiry into the Normative Implications of Rational Choice Theory, Erasmus Journal for Philosophy and Economics, Vol. 1, Issue 1, Autumn, pp. 185– 187. 316. Cf. ‘samenredzaamheid’ (H. Achterhuis, (2010), De utopie van de vrije markt, Lemniscaat, Rotterdam), but within the context of democratic institutions. 317. Treaty Establishing a Constitution for Europe, Official Journal, C/310/10 of 16/12/2004 (consolidated version Official Journal, C 115/47 of 9/5/2008.) 318. The Union has exclusive competence in a specific area when it alone is able to legislate and adopt legally binding acts. The member states may intervene in the areas concerned only if empowered to do so by the Union or in order to implement Union acts. Article I- 13 specifies the areas in which the Union has exclusive competence. 319. In this particular case, the member states and the Union have powers to legislate and adopt legally binding acts in a specific area. The member states exercise their powers in so far as the Union has not exercised, or has decided to stop exercising, its competence. This is an affirmation of the case law on preemption. Most of the Union’s competences fall into this category. Article I- 14 contains a non- exhaustive list of shared competences that correspond more or less to existing ones, except that they also include some advances in certain areas such as freedom, security, and justice. This article also lists certain competences which were previously regarded as parallel. The areas in question are research, technological development, space, development cooperation, and humanitarian aid. However, in these areas the principle of preemption does not apply, in that member states may continue to exercise their competences in parallel with the Union, even if the Union has exercised its own competences in these areas. 320. In certain areas and in the conditions laid down by the Constitution, the Union will have competence to carry out actions to support, coordinate, or supplement the actions of the member states, without thereby superseding their competence in these areas. The Union’s support will essentially be financial in nature. Legally binding acts adopted by the Union in this connection may not entail harmonization of member states’ laws or regulations. The areas in which this type of competence applies are listed exhaustively in Article I- 17. 394 Notes

321. Communication 2001(260) of 23/5/2011, Communication from the Commission to the Council, the European Parliament and the Economic and social Committee. 322. That notion was re- iterated in the Communication from the Commission to the Council, the European Parliament and the Economic and social Committee. Co- ordinating Member States’ direct tax systems in the Internal Market. See: COM/2006/823 of 19/12/2006. 323. In April 2011 (I), Com/2011/0206 final of 13.4.2011 and October 2012 (II), COM (2012) 573 final of 3.10.2012. 324. E.g. the freedom of goods, services, people, and capital. 325. Communication from the Commission to the Council, the European Parliament and the Economic and social Committee. Opinion of the Commission, pursu- ant to Article 48 of the Treaty on European Union, on the Conference of Representatives of the Member States’ governments convened to revise the Treaty. Com (2003) 548 final of 17.9.2003. 326. Communication from the Commission to the Council, the European Parliament and the Economic and Social Committee. Promoting Good Governance in Tax Matters, Com(2009) 201 final of 28.4.2009. 327. The convention intended to eliminate double taxation in the case of transfers of profits between associated enterprises in different member states, which was based on an old proposal (O. J. C 301 of 21 December 1976) and initially adopted (as a convention and directive as originally foreseen) in 1990 (Convention 90/436/EEC, O. J. L 225, 20.08.1990 P. 0010 – 0024). 328. Official Journal C2/1 of 6.1.1998. 329. Communication from the Commission to the Council, the European Parliament and the Economic and Social Committee. An action plan to strengthen the fight against tax fraud and tax evasion. COM (2012) 722 final of 6.12.2012. Commission recommendation on aggressive tax planning, COM (2012) 8806 Final of 6.12.2012. Commission recommendation regarding measures intended to encourage third countries to apply minimum standards of good governance in tax matters, COM (2012) 8805 Final of 6.12.2012. 330. It embodies four main functions: (1) stronger preventive action through a reinforced Stability and Growth Pact (SGP) and deeper fiscal coordination, (2) stronger corrective action through a reinforced SGP (which includes the launch of the Excessive Deficit Procedure (EDP), (3) minimum requirements for national budgetary frameworks, and (4) preventing and correcting macroeconomic and competitiveness imbalances. The legislation is known as the six- pack and includes: • Regulation (EU) No 1177/2011 of 8 November 2011 amending Regulation (EC) No 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure. • Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances. • Regulation (EU) No 1175/2011 of the European Parliament and of the Council of 16 November 2011 amending Council Regulation (EC) No 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies. • Regulation (EU) No 1174/2011 of the European Parliament and of the Council of 16 November 2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area. Notes 395

• Regulation (EU) No 1173/2011 of the European Parliament and of the Council of 16 November 2011 on the effective enforcement of budgetary surveillance in the euro area. • The six- pack is complemented with a Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States, OJ L 306, 23.11.2011, pp. 41– 47. 331. Treaty establishing the European Stability Mechanism of February 2, 2012. 332. Regulation (EU) No 473/2013 of the European Parliament and of the Council of May 21, 2013 on common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit of the member states in the euro area (Official Journal L140/11 of May 27, 2013) and Regulation (EU) No 472/2013 of the European Parliament and of the Council of May 21, 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability (Official Journal L 140/1 of May 27, 2013). 333. The provisions of the two- pack complement and extend the Stability and Growth Pact already reformed by the six- pack, and also integrate some elements of the already ratified intergovernmental European Fiscal Compact directly into EU law. See: Treaty on Stability Coordination and Governance in the Economic and Monetary Union (TSCG), applicable since January 1, 2013. Examples of identical elements with the Fiscal Compact: (1) member states are required to transpose the SGP fiscal rules into national legislation, (2) member states in EDP are required to prepare ‘economic partnership programs’, and (3) member states are required to submit their debt issuance plans for an ex- ante coordination with other member states. The balanced budget rule had to be incorporated into the member states’ national legal systems, preferably at constitutional level, within one year after the entry into force of the treaty, i.e. by January 1, 2014. Treaty parties are required to establish a self- correcting mechanism, guided by the monthly surveillance of a governmentally independent fiscal advisory council, which shall guarantee their national budget be in balance or surplus under the treaty’s definition. The treaty defines a balanced budget as a general budget deficit less than 3.0% of the gross domestic product (GDP), and a structural deficit of less than 1.0% of GDP if the debt- to- GDP ratio is significantly below 60% – or else it shall be below 0.5% of GDP. The treaty also contains a direct copy of the ‘debt brake’ criteria outlined in the Stability and Growth Pact, which defines the rate at which debt levels above the limit of 60% of GDP shall decrease. If the budget or estimated fiscal account for any ratifying state is found to be noncompliant with the deficit or debt criteria, the state is obliged to rectify the issue. If a state is in breach at the time of the treaty’s entry into force, the correction will be deemed to be sufficient if it delivers sufficiently large annual improvements to remain on a country- specific predefined ‘adjustment path’ towards the limits at a midterm horizon. Should a state suffer a significant recession, it will be exempted from the requirement to deliver a fiscal correction for as long as it lasts. Communication from the Commission. Common principles on national fiscal correction mechanisms. COM (2012) 342 Final of June 20, 2012. 334. Throughput consists of governance processes with the people, analyzed in terms of their efficacy, accountability, transparency, inclusiveness, and openness to interest consultation. See in detail: V. A. Schmidt, (2012), Democracy and Legitimacy in the European Union Revisited: Input, Output and ‘Throughput’, Political Studies, Vol. 61, Issue 1, pp. 2– 22. 396 Notes

335. D. Pinto, (2014), Capital Wars, Bloomsbury, New York. There is even research that claims that TTIPs will lead to contraction of GDP, incomes, and labor shares of GDP, and will lead to increased financial market and labor market instability; see: J. Capaldo, (2014), The Transatlantic Trade and Investment Partnership. European Disintegration, Unemployment and Instability, Global Development and Environment Institute, Working Paper, Nr. 14- 03. 336. C. Kenny, (2014), The Upside of Down: Why the Rise of the Rest Is Good for the West, Basic Books, New York; J. Kurzman, (2014), Unleashing the Second American Century: Four Forces for Economic Dominance, Public Affairs, New York. 337. L. Svendsen, (2008), A Philosophy of Fear, Reaktion Books, London, p. 45. 338. W. W. Streeck, (2014), Gekaufte Zeit: Die Vertagte Krise des Demokratischen Kapitalismus, trans. Buying Time, Suhrkamp, Berlin, Verso, London. 339. Ibid. p. 153. 340. ‘Etwas zu sagen haben werden ‘wir’ erst, wenn wir verstanden haben, dass wir grundsätzlich erst einmal nichts zu sagen haben’. Ibid. p. 132. 341. T. W. Adorno, (1969), Spätkapitalismus oder Industriegesellschaft: Verhandlungen des 16. Deutschen Sociologentagen, ‘Spätkapitalismus oder Industriegesellschaft?’, Stuttgart. 342. C. Reinhard and K. S. Rogoff, (2010), Growth in a Time of Debt, American Economic Review, Vol. 100, Issue 2, pp. 573– 578. 343. Olli Rehn, EU Commissioner for Economic Affairs, in a speech for the International Labor Organization in 2009 indicated, by referring to the paper, that ‘public debt in Europe is expected to stabilize only by 2014 and to do so at above 90% of GDP. Serious empirical research has shown that at such high levels, public debt acts as a permanent drag on growth’. J. Smith, (2013), From Reinhard’s and Rogoff’s Own data: UK GDP Increased Fastest When Debt- to- GDP was Highest – and the Debt Ratio Came Down, In Policy Research in Macro- economics. 344. That after a 28- year- old PhD student attempted to reconstruct the methodology and confirm the conclusions through the dataset, which he was unable to do. See: P. Jay, (April 23, 2013). ‘28- Year- Old PhD Student Debunks the Most Influential Austerity Study’. The Real News Network. Transcript of interview with Thomas Herndon and Michael Ash. J. Mencinger, A. Aristovnik, and M. Verbic, (2014), The Impact of Growing Public Debt on Economic Growth in the European Union, Amfitheatru Economic, Vol. 16, Issue 35, pp. 403– 414. 345. A. Pescatori, D. Sandri, and J. Simon, (2014), Debt and Growth: Is There a Magic Threshold?, IMF Working Paper, WP/14/34. 346. Ibid. p. 14. That understanding was later on in the year complemented by the awareness that it is hard in any case to disentangle pure debt- relief effects from other concurrent factors; see: S. Marcelino and I. Hakobyan, (2014), Does Lower Debt Buy Higher Growth, IMF Working Paper Series, Nr. WP/14/230. 347. The tripartite committee, led by the European Commission with the European Central Bank and the International Monetary Fund, that organized loans to the governments of Greece, Ireland, Portugal, and Cyprus. 348. See for example IMF, (2014), Jobs and Growth: Supporting a European Recovery, Chapter 2, F. Bornhorst and M. Ruiz- Arranz, ‘Growth and the Importance of Sequencing Debt Reductions Across Sectors’, http://www.imf.org/external/np/ seminars/eng/2014/EurBook/. 349. H. Rosa, (2012), Weltbeziehungen im Zeitalter der Beschleunigung, Suhrkamp Verlag. Notes 397

350. W. W. Streeck, (2014), Gekaufte Zeit: Die Vertagte Krise des Demokratischen Kapitalismus, trans. Buying Time, Suhrkamp, Berlin, Verso, London, passim. 351. P. Mair, (2013), Ruling the Void: The Hollowing- Out of Western Democracy, Verso, London, p. 145, passim. 352. A term coined to express the fact that control over political decision- making might lie beyond the reach of the ordinary citizen. See: E. E. Schattschneider, (1960) The Semi- Sovereign People: A Realists’ View of Democracy in Europe, Cengage Learning, New York. 353. D. Coffman, A. Leonard, and L. Neal, (2013), Questioning Credible Commitment: Perspectives on the Rise of Financial Capitalism, Cambridge University Press, Cambridge. 354. F. W. Scharpf, (1999), Governing in Europe, Effective and Democratic?, Oxford University Press, Oxford, pp. 10 ff. 355. C. Sharman, (2008), Political Legitimacy for an Appointed Senate, IRPP Choices, Vol. 14, Issue 11, September 2008, pp. 2– 25. 356. S. Steinmo, (1993), Taxation and Democracy: Swedish, American and British Approaches to Financing the Modern State, Yale University Press, New Haven, CT. 357. C. Crouch, (2004), Post- Democracy, Polity Press, Cambridge and later A. Schäfer, (2009), Krisentheorien der Demokratie: Unregierbarkeit, Spätkapitalismus and Post- demokratie, Der moderne staat, Vol. 2, Issue 1, pp. 159– 183. 358. W. Streeck and D. Mertens, (2010), Politik im Defizit: Austerität als fiskalpolitisches Regime, MPIfG Discussion Paper 10/5 Max- Planck- Institut für Gesellschaftsforschung, Köln, p. 32. He argues: ‘Je mehr Politik an materieller Responsivität verliert, desto mehr muss sie zu Unterhaltung werden; je mehr ihre disponiblen Ressourcen schwinden, desto weniger dürfen ihre Bürger von ihr erwarten, und desto weniger erwarten sie. Damit schrumpft der Kern des demokratischen politischen Systems und ändert zugleich seine Gestalt, während sein ausgegliederter Rand immer größer wird…’. Also: J. M. Buchanan and R. E. Wagner, (1977), Democracy in Deficit: The Political Legacy of Lord Keynes, Academic Press, New York; J. M. Buchanan and R. E. Wagner, (1978), The Political Biases of Keynesian Economics, in J. M. Buchanan/R. E. Wagner (eds.), Fiscal Responsibility in Constitutional Democracy, Martinus Nijhoff Social Sciences Division, Boston, MA, pp. 79– 100. 359. M. Höpner and A. Schäfer, (2012), Integration among Unequals: How the Heterogeneity of European Varieties of Capitalism Shapes the Social and Democratic Potential of the EU, MPIfG Discussion Paper 12/5 Max- Planck- Institut für Gesellschaftsforschung, Köln. 360. Ibid. p. 25. 361. R. A. Dahl, (1999), Can International Organizations be Democratic? A Skeptic’s View, in Ian Shapiro/Casiano Hacker- Cordón (eds.), Democracy’s Edges, Cambridge University Press, Cambridge, p. 20. 362. A. Follesdal and S. Hix, (2006), Why There is a Democratic Deficit in the EU: A Response to Majone and Moravcsik, Journal of Common Market Studies, Vol. 44, pp. 533– 562. 363. M. Höpner and A. Schäfer, (2012), Integration among Unequals: How the Heterogeneity of European Varieties of Capitalism Shapes the Social and Democratic Potential of the EU, MPIfG Discussion Paper 12/5 Max- Planck- Institut für Gesellschaftsforschung, Köln, p. 25. They reject the notion of institutional reform since ‘The underlying assumption is that politicization will generate European parties, interest groups, and social movements that organize 398 Notes

across borders and that will, in turn, instigate public debates and help to build a European demos’. That assumption is also followed by Habermas: ‘Relevant interests formed along the lines of political ideology, economic sector, occupational position, social class, religion, ethnicity and gender would moreover fuse across national boundaries’. J. Habermas, (2001), Why Europe Needs a Constitution, New Left Review, Vol. 11, p. 17. 364. M. Höpner and A. Schäfer, (2012), Integration among Unequals: How the Heterogeneity of European Varieties of Capitalism Shapes the Social and Democratic Potential of the EU, MPIfG Discussion Paper 12/5 Max- Planck- Institut für Gesellschaftsforschung, Köln, p. 25. 365. L. Hooghes and G. Marks, (2009), A Post- functionalist Theory of European Integration: From Permissive Consensus to Constraining, British Journal of Political Science, Vol. 39, pp. 1– 23. 366. Unless one would lower the majority requirements. M. Höpner and A. Schäfer, (2012), Integration among Unequals: How the Heterogeneity of European Varieties of Capitalism Shapes the Social and Democratic Potential of the EU, MPIfG Discussion Paper 12/5 Max- Planck- Institut für Gesellschaftsforschung, Köln, p. 26. 367. J. Habermas, (2001), Why Europe Needs a Constitution, New Left Review, Vol. 11, p. 14. 368. J. Beckfield, (2006), European Integration and Income Equality, American Sociological Review, Vol. 71, pp. 964– 985. P. Genschel, A. Kemmerling, and E. Seils, (2011), Accelerating Downhill: How the EU Shapes Corporate Tax Competition in the Single Market, Journal of Common Market Studies, Vol. 49, pp. 585– 606. 369. See infra. In detail: F. W. Scharpf, (2011), Monetary Union, Fiscal Crisis and the Preemption of Democracy, MPIfG Discussion Paper 11/11. Cologne: Max Planck Institute for the Study of Societies and M. Höpner and F. Rödl, (2012), Illegitiem und rechtswidrig: Das neue makroökonomische Regime im Euroraum, Wirtschaftdienst, Vol. 92, pp. 219– 237. 370. ‘Today’s calamities were preceded by high inflation in the late 1960s and 1970s, rising public deficits in the 1980s, and growing private indebtedness in the 1990s and 2000s’. W. Streeck, (2011), The Crisis in Context: Democratic Capitalism and Its Contradictions MPIfG Discussion Paper 11/15, p. iii. 371. Ibid. p. iii. 372. J. Buchanan and G. Tullock, (1962), The Calculus of Consent: Logical Foundation of Constitutional Democracy, University of Michigan Press, Ann Arbor, MI. 373. W. Streeck, (2011), The Crisis in Context: Democratic Capitalism and Its Contradictions MPIfG Discussion Paper 11/15, p. 3. 374. See in detail: G. R. Krippner, (2011), Capitalizing on Crisis: The Political Origins of the Rise of Finance, Harvard University Press, Cambridge, MA. 375. W. Streeck, (2011), The Crisis in Context: Democratic Capitalism and Its Contradictions MPIfG Discussion Paper 11/15, p. 22. 376. W. Streeck, (2013), The Politics of Public Debt: Neoliberalism, Capitalist Development, and the Restructuring of the State MPIfG Discussion Paper 13/7, p. 1. (Reprint: German Economic Review, (2014) Special Issue: Special Issue on Government Debt in Democracies: Causes, Effects, and Limits, Vol. 15, Issue 1, pp. 143– 165). He demonstrates that political- economic theories, which attribute the rise in government debt to an inherent tendency of democracies to ‘live beyond their means’, cannot account for the fiscal crisis of today (democratic Notes 399

failure theory) pp. 1– 2. The ultimate cause, ‘is the long- term decline in the growth performance of advanced capitalist economies and their subsequent inability to honor the promises of economic and human progress on which their legitimacy depended’ (p. 2). For the proximate causes see Streeck, Ibid. pp. 7– 13. See further: C.- L. Holtfrerich, (2007), Wo sind die Jobs? Eine Streitschrift für mehr Arbeit, Deutsche Verlagsanstalt, München. Insufficient growth has given rise, over time, to a sequence of different types of crisis: ‘(i) high inflation and low debt in the 1970s followed, from 1980 to 1993, by (ii) low inflation and public and private debt rising simultaneously, and from 1994 to 2007 by (iii) low inflation, receding public debt, and further increasing private debt. Since 2008, we continue to see (iv) low inflation, now combined with slightly declining private debt and exploding public debt’ (W. Streeck, (2013), The Politics of Public Debt: Neoliberalism, Capitalist Development, and the Restructuring of the State MPIfG Discussion Paper 13/7, p. 12). 377. Ibid. p. 2. 378. ‘Pumpkapitalismus’ in R. Dahrendorf, (2009), Vom Sparkapitalismus zum Pumpkapitalismus, Cicero Online, July 23, 2009. 379. W. Streeck, (2013), The Politics of Public Debt: Neoliberalism, Capitalist Development, and the Restructuring of the State MPIfG Discussion Paper 13/7, p. 14, W. W. Streeck, (2014), Gekaufte Zeit: Die Vertagte Krise des Demokratischen Kapitalismus, trans. Buying Time, Suhrkamp, Berlin, Verso, London, pp. 117– 132. 380. M. Kalecki, (1943), Political Aspects of Full Employment, The Political Quarterly, Vol. 14, Issue 4, pp. 322– 331. 381. W. Streeck, (2013), The Politics of Public Debt: Neoliberalism, Capitalist Development, and the Restructuring of the State MPIfG Discussion Paper 13/7, p. 16. 382. M. Blyth, (2013), Austerity: The History of a Dangerous Idea, Oxford University Press, Oxford; R. Boyer, (2012), The Four Fallacies of Contemporary Austerity Policies: The Lost Keynesian Legacy, Cambridge Journal of Economics, Vol. 36, Issue 1, pp. 283– 312. 383. W. Streeck and D. Mertens, (2011), Fiscal Austerity and Public Investment: Is the Possible the Enemy of the Necessary? MPIfG Discussion Paper 11/12. Cologne: Max Planck Institute for the Study of Societies. 384. W. Streeck, (2013), The Politics of Public Debt: Neoliberalism, Capitalist Development, and the Restructuring of the State MPIfG Discussion Paper 13/7, p. 18. 385. J. Karabel, (2012), Grand Illusion: Mobility, Inequality, and the American Dream, The Huffington Post, 2014/10/2. 386. As a reminder: Input legitimacy relates to the functioning and machinery of an institution: how members are selected, the procedures by which decisions are made and power exercised, and so on. Output legitimacy refers to the public assessment of the relevance and quality of the institution’s performance. 387. V. A. Schmidt, (2002), Does Discourse Matter in the Politics of Welfare State Adjustment?, Comparative Political Studies, Vol. 35, Issue 2, pp. 168– 193. V. A. Schmidt, (2006), Democracy in Europe: The EU and National Polities, Oxford University Press, Oxford. 388. P. Pettit, (1997), Republicanism: A Theory of Freedom and Government, Clarendon Press, Oxford. 389. In the case of Spain, it did not involve a bailout of the sovereign itself directly, but of the national banking system. Given the significant reliance of the 400 Notes

sovereign on funding made available by the (national) banking system some equation is justified. 390. In fact both input and output legitimacy: Input legitimacy for the reasons discussed before (extra- competency) and output legitimacy given the large under- performance of these GIPPS economies in recent years partly or to a large degree caused by the austerity imposed by the Troika. See about this specific topic and relationship: M. Blyth, (2013), Austerity: The History of a Dangerous Idea, Oxford University Press, Oxford. 391. F. W. Scharpf, (2011), Monetary Union, Fiscal Crisis and the Preemption of Democracy, MPIfG Discussion Paper 11/11, pp. 37– 38. 392. See in extenso F. W. Scharpf, (2012), Legitimacy Intermediation in the Multilevel European Polity and Its Collapse in the Euro Crisis, MPIfG Discussion Paper 12/6 Max- Planck- Institut für Gesellschaftsforschung, Köln, pp. 1– 13. Reprint in Klaus Armingeon (Hg.), (2013), Staatstätigkeiten, Parteien und Demokratie, Springer Fachmedien, Wiesbaden, pp. 567– 596. 393. D. Easton, (1965), A Systems Analysis of Political Life, Wiley, New York. 394. F. W. Scharpf, (2012), Legitimacy Intermediation in the Multilevel European Polity and Its Collapse in the Euro Crisis, MPIfG Discussion Paper 12/6 Max- Planck-Institut für Gesellschaftsforschung, Köln, p. 18. F. W. Scharpf, (2000), Interdependence and Democratic Legitimation, in S. J. Pharr/ R. D. Putnam (eds.), Disaffected Democracies: What’s Troubling the Trilateral Countries?, Princeton University Press, Princeton, pp. 101– 120. 395. G. Majone (ed.), (1996), Regulating Europe, Routledge, London. A. Moravcsik, (2002), In Defence of the Democratic Deficit: Reassessing Legitimacy in the European Union, Journal of Common Market Studies, Vol. 40, Issue 4, pp. 603– 624. 396. A. M. Bickel, (1986), The Least Dangerous Branch: The Supreme Court at the Bar of Politics, Yale University Press [1962], pp. 150– 170. 397. F. W. Scharpf, (2012), Legitimacy Intermediation in the Multilevel European Polity and Its Collapse in the Euro Crisis, MPIfG Discussion Paper 12/6 Max- Planck- Institut für Gesellschaftsforschung, Köln, p. 19. 398. Ibid. p. 20. 399. F. W. Scharpf, (2011), Monetary Union, Fiscal Crisis and the Pre- emption of Democracy, Zeitschrift für Staats- und Europawissenschaften, Vol. 9, Issue 2, pp. 163– 198. 400. R. A. Mundell, (1961), A Theory of Optimal Currency Areas, American Economic Review, Vol. 51, Issue 4, 657– 665. 401. H. Flassbeck and L. Costas, (2013), The Systemic Crisis of the Euro: True Causes and Effective Therapies, Rosa- Luxemburg- Stiftung, Berlin. 402. B. Eichengreen, (1990), Is Europe an Optimal Currency Area? CEPR Discussion Paper Nr. 478, Centre for Economic Policy Research London. 403. M. Heipertz and A. Verdun, (2010), Ruling Europe: The Politics of the Stability and Growth Pact, Cambridge University Press, Cambridge. D. Marsh, (2009), The Euro: The Battle for the New Global Currency, Yale University Press, New Haven. 404. Those included reduced transaction costs, which would increase trade, while competition would equalize prices and discipline wage increases. The removal of currency risk and balance- of- payments constraints would facilitate cross- border capital flows to finance the catch- up development of relatively backward economies. The benefits would exceed the potential costs associated with the loss of autonomous exchange rates. See in detail: F. W. Scharpf, (2013), Political Legitimacy in a Non- optimal Currency Area, MPIfG Discussion Paper 13/15 Notes 401

Max- Planck-Institut für Gesellschaftsforschung, Köln, p. 5. The article is published in O. Cramme and S. B. Hobolt (eds.), (2014), Democratic Politics in a European Union Under Stress, Oxford University Press, Oxford, pp. 19– 47. 405. H. Enderlein, (2004), Nationale Wirtschaftspolitik in der europäischen Währungsunion, Campus, Frankfurt a.M. 406. For an overview F. W. Scharpf, (2012), Legitimacy Intermediation in the Multilevel European Polity and Its Collapse in the Euro Crisis, MPIfG Discussion Paper 12/6 Max- Planck-Institut für Gesellschaftsforschung, Köln, p. 21. 407. Ibid. p. 22. 408. P. De Grauwe, (2012), Economics of Monetary Union, 9th Ed., Oxford University Press, Oxford, pp. 176– 182 illustrating the divergence between the ECB rate and the desired interest rate for individual member states. The uniform interest rate extended the booms and recessions in individual member states. 409. These supply- side reforms combined wage constraints have led to an export- led recovery in ‘hard currency’ countries and expansion of low- wage unemployment. The decline of domestic demand and export increases led to increasing current- account surplus and an undervaluation of the real exchange rate which subsidized exports (F. W. Scharpf, (2013), Political Legitimacy in a Non- optimal Currency Area, MPIfG Discussion Paper 13/15 Max- Planck- Institut für Gesellschaftsforschung, Köln, p. 6. The opposite happened in soft currency countries with the EU: rising domestic demand and imports, economic growth, employment, and wages, which led to current- account deficits and an overval- ued real exchange rate which dampened those countries exports. 410. In extenso F. W. Scharpf, (2012), Legitimacy Intermediation in the Multilevel European Polity and Its Collapse in the Euro Crisis, MPIfG Discussion Paper 12/6 Max- Planck-Institut für Gesellschaftsforschung, Köln, p. 26. 411. Regarding the impact on debtor and creditor nations and the impact of the six- pack and two- pack regulations discussed before, as well as the ‘excessive imbalance procedure’ (EIP) which focuses solely on the need to control national policies without reference to the impact on uniform monetary policies, see in detail F. W. Scharpf, (2012), Legitimacy Intermediation in the Multilevel European Polity and Its Collapse in the Euro Crisis, MPIfG Discussion Paper 12/6 Max- Planck- Institut für Gesellschaftsforschung, Köln, p. 27. Scharpf argues: ‘In contrast to rules on budget deficits, however, practically all the balances listed on the scoreboard (in the EIP) are not under the direct control of governments. They are exactly the instruments (monetary, fiscal and exchange- rate instruments) that the ECB now controls and uses in a uniform way which will continue to lead to imbalances it wants to avoid’. 412. Which were justified based on a questionable Treaty base. See: M. Höpner and A. Schäfer (eds.), (2008), Die politische Ökonomie der europäischen Integration, Campus, Frankfurt a.M. 413. F. W. Scharpf, (2012), Legitimacy Intermediation in the Multilevel European Polity and Its Collapse in the Euro Crisis, MPIfG Discussion Paper 12/6 Max- Planck- Institut für Gesellschaftsforschung, Köln, p. 28. 414. According to the reverse qualified majority voting (RQMV) procedure proposed by the Commission in the context of the economic governance package, a Commission recommendation is deemed to be adopted unless the Council decides by qualified majority to reject the recommendation within a given deadline that starts to run from the adoption of such a recommendation by the Commission. 402 Notes

415. F. W. Scharpf, (2012), Legitimacy Intermediation in the Multilevel European Polity and Its Collapse in the Euro Crisis, MPIfG Discussion Paper 12/6 Max- Planck- Institut für Gesellschaftsforschung, Köln, p. 29. He also draws a distinction with unitary states (which the EU is not). Legitimate authority is concentrated at the top and may justify intervention at all decentralized levels and all competency areas. ‘the discretionary authority claimed by the Commission in the Six- Pack Regulations is neither legitimated by intergovernmental agreement nor could it be supported by arguments invoking the legitimacy of democratic centralism’. 416. J. Habermas, (2011), Constitutional Democracy: A Paradoxical Union of Contradictory Principles, Political Theory, Vol. 29, Issue 6, pp. 766– 781. 417. Which is highly unlikely in the near- to midterm future, as the handling of the euro crisis and the claims of fiscal irresponsibility have created even wider divergences among European nations. A return to an enhanced EMU (European Monetary Union) is advocated by Scharpf, but highly unlikely. 418. F. W. Scharpf, (2012), Legitimacy Intermediation in the Multilevel European Polity and Its Collapse in the Euro Crisis, MPIfG Discussion Paper 12/6 Max- Planck- Institut für Gesellschaftsforschung, Köln, suggests a relation legitimacy, i.e. if we cannot enhance European legitimacy, we might reduce the need for it by reducing by lowering the political salience (reducing non- legitimate demands and constraints on member states policies) of European policies (p. 30). 419. See for example how it impacted policymaking and design in financial market regulation: R. Mayntz, (2014), Markt oder Staat? Kooperationsprobleme in der Europäische Union, MPIfG Discussion Paper 14/3. She points also to a deeper issue, i.e. the relation between ‘state’ and ‘market’. The different viewpoints constrain cooperation within the EU. 420. See in detail for all implications: F. W. Scharpf, (1999), Governing in Europe: Effective and Democratic?, Oxford University Press, Oxford; L. Calmfors, (2001), Wages and Wage Bargaining Institutions in the EMU: A Survey of the Issues. CESifo Working Paper Nr. 520, Center for Economic Studies and Ifo Institute for Economic Research, Munich; M. Höpner, (2013), Die Verschiedenheit der europäischen Lohnregime und ihr Beitrag zur Eurokrise, MPIfG Discussion Paper 13/5, Max Planck Institute for the Study of Societies, Cologne. 421. Nominal interest rates converged after the introduction of the euro, but they in turn resulted in higher real interest rates in low- inflation EU countries and very low – even negative – interest rates in soft- currency EU economies. The consequence is what we have observed after 2002: domestic demand was dampened in the first group of countries and skyrocketed in the latter through the availability of cheap credit. 422. The EC indicated: ‘It is therefore essential that member states put in place an ambitious and comprehensive policy response geared at speeding up and improving intra- area adjustment mechanisms … The policy response should be comprehensive. It should cover measures in four key areas: fiscal policies, credit markets, labour markets, and product and service markets’, EU Commission, (2010), Surveillance of Intra- Euro- Area Competitiveness and Imbalances: European Economy 1/2010, Brussels: Directorate- General for Economic and Financial Affairs, p. 3. 423. Established by two regulations for the ‘Prevention and Correction of Macroeconomic Imbalances’ (EU 1174 and 1176/2011). They extend the Notes 403

Commission’s supervision, control, and sanctioning powers to an undefined range of national policy areas, without any reference to the division of European and national competences. What matters is that the new powers will finally satisfy ‘the need for a stronger framework, and reinforced governance, including financial disincentives, to ensure that recommendations are appropriately taken into account at national level’ (EU Commission, (2012), First Alert Mechanism Report on Macroeconomic Imbalances in Member States). 424. 1176/2011, Article 7.2. 425. 1176/2011, Article 10.4. 426. These include current accounts, capital accounts, export market shares, unit labor costs, real effective exchange rates, private sector debt, private sector credit flows, changes in house prices, general government debt, unemployment rates, and financial sector liabilities. 427. Alternatively it indicates: ‘recommendations … should be addressed to the Member State concerned to provide guidance on appropriate policy responses. The policy response of the Member State … should use all available policy instruments under the control of public authorities’ (Regulation 1176/2011 at #20). 428. F. W. Scharpf, (2013), Political Legitimacy in a Non- optimal Currency Area, MPIfG Discussion Paper 13/15 Max- Planck-Institut für Gesellschaftsforschung, Köln, p. 12. 429. Ibid.: ‘What has been set up is meant to be a legally and politically uncon- strained expert regime’. 430. H. Enderlein, (2004), Nationale Wirtschaftspolitik in der Europäischen Währungsunion, Campus, Frankfurt a.M. Notre Europe, (2012), Completing the Euro: A Road Map toward Fiscal Union in Europe. Report of the ‘Tommaso Padoa Schioppa Group’. Studies and Reports Nr. 92, Notre Europe, Paris. 431. As laid down in EU Commission, (1990), One Market, One Money: An Evaluation of the Potential Benefits and Costs of Forming an Economic and Monetary Union, Directorate-General for Economic and Financial Affairs, Brussels. 432. Based on a report by the Tommaso Padoa- Schioppa Group. Tommaso Padoa- Scioppia is one of the founding architects of the single European currency. 433. F. W. Scharpf, (2013), Political Legitimacy in a Non- optimal Currency Area, MPIfG Discussion Paper 13/15 Max- Planck-Institut für Gesellschaftsforschung, Köln, p. 20. 434. Ibid. p. 23. 435. See also: F. W. Scharpf, (2014), No Exit from the Euro- Rescuing Trap, MPIfG Discussion Paper 14/4. 436. See the opinion of the Advocate-General published post- closing of this manuscript in the case C- 62/14 of January 14, 2015, par.’s 59, 100,111 and 173. 437. Throughput- oriented authority (as an intermediary dimension between input and output, which is based on both democratic procedural criteria (e.g. regulatory accountability) and performance- oriented procedural criteria (e.g. performance accountability), which would then be judged based on criteria such as the ways of decision- making, quality of participation, and implemented checks and balances: See in detail: V. Bekkers, G. Dijkstra, A. Edwards, and M. Fenger, (2013), Governance and the Democratic Deficit: Assessing the Democratic Legitimacy of Governance Practices, Ashgate, Surrey, see in particular Chapter 12: F. van Nispen and J. Posseth, Democratic Legitimacy of Economic Governance: The case of the European and Monetary Union. 404 Notes

438. V. A. Schmidt, (2013), Democracy and Legitimacy in the European Union Revisited, Input, Output and Throughput, Political Studies, Vol. 61, Issue 1, pp. 2– 22. 439. The Council has been stripped of effective interference power through the aforementioned reverse QMV rule. 440. F. W. Scharpf, (2013), Political Legitimacy in a Non- optimal Currency Area, MPIfG Discussion Paper 13/15 Max- Planck-Institut für Gesellschaftsforschung, Köln, p. 23. 441. Ibid. p. 24. 442. J. Habermas, (2011), Zur Verfassung Europas: Ein Essay, Suhrkamp, Berlin; S. Collignon, (2013), European Republic: Reflections on the Political Economy of a Future Constitution, Federal Trust for Education and Research, London. 443. The term consociational (viewed as a form power- sharing) has been first coined A. Lijphart, see A. Lijphart, (2004), Constitutional Design for Divided Societies, Journal of Democracy, Vol. 15, Issue 2, pp. 96– 109; The term itself is traced back to as early as 1917 (see J. McGarry and B. O’Leary, (1993), Introduction: The Macro- Political Regulation of Ethnic Conflict, in J. McGarry and B. O’Leary (eds.), The Politics of Ethnic Conflict Regulation: Case Studies of Protracted Ethnic Conflicts, Routledge, London, pp. 1– 40. See further M. J. Gabel, (1998) The Endurance of Supranational Governance: A Consociational Interpretation of the European Union, Comparative Politics, Vol. 30, Issue 4, pp. 463– 475. S. Hix, (1994), The Study of the European Community: The Challenge to Comparative Politics, West European Politics, Vol. 17, Issue 1, pp. 1– 30. M. F. Schmidt, (2002), The Consociational State: Hypotheses Regarding the Political Structure and Potential for Democratization of the European Union, Acta Politica, Vol. 37, pp. 213– 227. This model persists in countries and regions known for their deep ethnic, linguistic, religious, or other politically salient cleavage, because the political elites representing the several ‘pillars’ or ‘Lager’ have agreed to avoid majority decisions and to seek compromises or consensus in all matters affecting the vital interests of any one group. (F. W. Scharpf, (2013), Political Legitimacy in a Non- optimal Currency Area, MPIfG Discussion Paper 13/15 Max- Planck- Institut für Gesellschaftsforschung, Köln, p. 27. 444. K. Nicolaidis, (2004), We, the Peoples of Europe, Foreign Affairs, Vol. 83, Issue 6, pp. 97– 110 and K. Nicolaidis, (2013), European Demoicracy and Its Crisis, Journal of Common Market Studies, Vol. 51, Issue 2, pp. 351– 369. F. Cheneval, (2011), The Government of the Peoples: On the Idea and Principles of Multilateral Democracy, Palgrave Macmillan, London. F. Cheneval and F. Schimmelfennig, (2013), The Case for Democracy in the European Union, Journal of Common Market Studies, Vol. 51, Issue 2, pp. 334– 350. 445. F. W. Scharpf, (2013), Political Legitimacy in a Non- optimal Currency Area, MPIfG Discussion Paper 13/15 Max- Planck-Institut für Gesellschaftsforschung, Köln, p. 27. 446. P. Mair, (2009), Representative versus Responsible Government, MPIfG Working Paper 09/8. 447. R. Munch, (2010), European Governmentality: The Liberal Drift to Multilevel Governance, Taylor & Francis Ltd., London. Also R. Munch, (2010), The European Regime of Liberal Democracy: Regulation, Law and Politics in the Multilevel System, Routledge, London. Notes 405

448. R. Munch, (2012), Inclusion and Exclusion in the Liberal Competition State, The Cult of the Individual, Routledge, London. 449. For ‘why’ it has been ignored see: A. Follesdal and S. Hix, (2006), Why There is a Democratic Deficit in the EU: A Response to Majone and Moravcsik, Journal of Common Market Studies, Vol. 44, Issue 3, pp. 533– 562, pointing to output- oriented satisfaction combined with citizens’ lack of concern about input- oriented deficiencies at the European level. 450. F. W. Scharpf, (2014), No Exit from the Euro- Rescuing Trap, MPIfG Discussion Paper 14/4, p. 4. 451. M. Th. Greven, (2000), Can the European Union Finally Become a Democracy?, in M. Th. Greven and L. W. Pauly (eds.), Democracy Beyond the State? The European Dilemma and the Emerging Global Order, Roman & Littlefield, Lanham, pp. 35– 61. 452. See for an analysis: F. W. Scharpf, (2014), No Exit from the Euro- Rescuing Trap, MPIfG Discussion Paper 14/4, pp. 4– 6 and which include o.a. the centralized monetary policy in a non- optimal currency area causing loss of control over inflation, exchange rates, and unemployment and the loss (or severely constraining) of fiscal competencies for expansionary purposes due to the Stability Pact. The inflation differential among European member states did not prevent the convergence of nominal interest rates. But they had the effect of converting these into higher real interest rates in low- inflation countries, and into very low or even negative real interest rates in high inflation/soft currency member states. Scharpf concludes: ‘What went wrong, in short, is that Monetary Union in a non- optimal currency area and uniform ECB monetary policies had produced dynamically diverging real exchange rates and current accounts among eurozone economies (p. 6)’. 453. P. Hall, (2012), The Economics and Politics of the Euro Crisis, German Politics, Vol. 21, Issue 4, pp. 355– 371. 454. See for an evaluation of the basic policy option that were available at that time, F. W. Scharpf, (2014), No Exit from the Euro- Rescuing Trap, MPIfG Discussion Paper 14/4, pp. 7– 11. 455. See in detail Scharpf (2014). Ibid. pp. 11– 15. 456. Which is used as the criterion in some of the literature: See in detail: G. Majone, (1996), Regulatory Legitimacy, in G. Majone (ed.), Regulating Europe, Routledge, Routledge, pp. 284– 301. G. Majone, (1998), Europe’s Democratic Deficit, European Law Journal, Vol. 4, Issue 1, pp. 5– 28 and A. Moravcsik, (2002), In Defence of the ‘Democratic Deficit’: Reassessing Legitimacy in the European Union, Journal of Common Market Studies, Vol. 40, Issue 4, pp. 603– 624. 457. F. Haffert and Ph. Mehrtens, (2013), From Austerity to Expansion, MPIfG Diacussion Paper 13/16. 458. While surpluses were mostly achieved through expenditure cuts, they were predominantly used for cutting taxes. While fiscal crises abated, their collateral damage to public expenditure remained. 459. See for an evaluation of the options F. W. Scharpf, (2014), No Exit from the Euro- Rescuing Trap, MPIfG Discussion Paper 14/4, pp. 15– 18. 460. J. Habermas, (2012), The Crisis of the European Union: A Response, Polity, London, Chapters I and II in particular. He advocates a cosmopolitan community. Although the EU had/has that potential, a rock- solid foundation would have to be immanent in the foundational fabric of the EU, which it its contemporary format is clearly missing. 406 Notes

4 Constructing an Alternative Tax Model Against the Background of a Changing (Tax) Sovereignty Paradigm Within the EU

1. F. H. Hinsley, (1986), Sovereignty, Cambridge University Press, Cambridge, p. 18. 2. F. X. Perrez, (1997), Cooperative Sovereignty: From Independence to Interdependence in the Structure of International Environmental Law, Kluwer Law International, London, p. 43. 3. Ibid. p. 44. 4. ECJ, order of March 21, 1997, Région wallonne vs. Commission of the European Communities, Case C- 95/97, E.C.R. 1997, p. I- 1787; ECJ, order of October 1, 1997, Regione Toscana vs. Commission of the European Communities, Case C- 180/97, E.C.R. 1997,p. I- 5245, paragraph 6; ECJ, June 12, 1990, Federal Republic of Germany vs. Commission of the European Communities, Case C- 8/88, E.C.R. 1990, I- 2321, paragraph 13; ECJ, June 1, 1999, Klaus Konle vs. Republik Österreich, Case C- 302/97, E.C.R. 1999, p. I- 3099, paragraph 62; ECJ, July 4, 2000, Salomone Haim v Kassenzahnärztliche Vereinigung Nordrhein, Case C- 424/97, E.C.R. 2000, p. I- 5123, paragraphs 28 ff. 5. N. Walker, (2003), Late Sovereignty in the European Union, in N. Walker (ed.), Sovereignty in Transition, Hart Publishing, Oxford, Portland, p. 6; S. D. Krasner, (1999), Sovereignty, Organised Hypocrisy, Princeton University Press, Princeton, p. 40. 6. M. Isenbaert, (2010), EC Law and the Sovereignty of Member States in Direct Taxation, IBFD Doctoral Series Nr. 19, Amsterdam, p. 65. 7. N. Walker, (2003), Late Sovereignty in the European Union, in N. Walker (ed.), Sovereignty in Transition, Hart Publishing, Oxford, Portland, pp. 11– 12. Ibid. p. 11. 8. Ibid. p.11. 9. M. Isenbaert, (2010), EC Law and the Sovereignty of Member States in Direct Taxation, IBFD Doctoral Series Nr. 19, Amsterdam, p. 72. 10. Ibid. p. 74. 11. Ibid. p. 75. He developed his theory in the wake of the concept development of ‘late sovereignty’ by N. Walker; (see N. Walker, (2003), Late Sovereignty in the European Union, in N. Walker (ed.), Sovereignty in Transition, Hart Publishing, Oxford, Portland, p. 22). 12. M. Isenbaert, (2010), EC Law and the Sovereignty of Member States in Direct Taxation, IBFD Doctoral Series Nr. 19, Amsterdam, p. 76. 13. N. Walker, (2003), Late Sovereignty in the European Union, in N. Walker (ed.), Sovereignty in Transition, Hart Publishing, Oxford, Portland, p. 23. 14. M. Isenbaert, (2010), EC Law and the Sovereignty of Member States in Direct Taxation, IBFD Doctoral Series Nr. 19, Amsterdam, p. 77. 15. T. Schilling, (1996), The Autonomy of the Community Legal Order: An Analysis of Possible Foundations, Harvard International Law Journal, Vol. 17, p. 389. 16. See for the body of literature M. Isenbaert, (2010), EC Law and the Sovereignty of Member States in Direct Taxation, IBFD Doctoral Series Nr. 19, Amsterdam, p. 122 footnotes 406– 408. 17. See also for a detailed analysis: Ibid. pp. 88– 125. 18. See for the comprehensive body of jurisprudence: Ibid. pp. 125– 149. 19. Ibid. p. 184. 20. Ibid. p. 185. Notes 407

21. Even in the early days: ECJ, February 14, 1995, Case C- 279/93, Finanzamt Köln- Altstadt vs. Roland Schumacker, E.C.R. 1995, p. I- 00225, paragraph 21; see also, with regard to the registration of vessels: ECJ, October 4, 1991, Case C- 246/89, Commission of the European Communities vs. United Kingdom of Great Britain and Northern Ireland, E.C.R. 1991, p. I- 04585, paragraph 12. 22. ‘ Function- sovereignty’ and ‘competence’ are two very different concepts: the former indicates ultimate authority to perform the functions or to pursue the objectives that are inherent to a certain policy area, while the latter concept signifies little more than being able to assert a legal claim with regard to a certain subject matter (See: M. Isenbaert, (2010), EC Law and the Sovereignty of Member States in Direct Taxation, IBFD Doctoral Series Nr. 19, Amsterdam, p. 197). 23. Ibid. p. 190. 24. See a contrario: F. Vanistendael, (2008), Does The ECJ Have The Power of Interpretation to Build a Tax System Compatible with the Fundamental Freedoms?, E.C. Tax Review, Vol. 17, Issue 2, p. 56. He takes a more formal approach when he points out that the Council, even when acting unanimously, is still acting as an institution of the Union, the outcome of which cannot be reduced to a joint action of the respective member states. Potentially the positions can be married by arguing that in the legislative process the council members represent their member states versus the fact that once decisions are taken and legislation enacted this ‘decision’ becomes an integral part of Community law, with all the attributes thereof, such as supremacy, direct effect, and the possibility of judicial review by the ECJ (See M. Isenbaert, (2010), EC Law and the Sovereignty of Member States in Direct Taxation, IBFD Doctoral Series Nr. 19, Amsterdam, p. 193). 25. TFEU Article 115 Approximation of laws: for the harmonization of national measures ‘as directly affect the establishment or functioning of the common market’. There used to be an article 308 under the EC treaty which permitted ‘appropriate measures’ to be adopted if action by the community should prove necessary to attain one of the objectives of the community and the treaty has not provided the necessary powers. The article was not retained under TFEU. 26. M. Isenbaert, (2010), EC Law and the Sovereignty of Member States in Direct Taxation, IBFD Doctoral Series Nr. 19, Amsterdam, p. 198 with further reference to literature and jurisprudence. 27. M. W. C. Feteris, (1993), Belastingen en mensenrechten, NJCM Bulletin, pp. 755– 771 and NJCM Bulletin (1995), pp. 767– 784; M. Dassesse, (1994), Human Rights, European Law and Tax Law: the Implications of the Judgments of the Court of Human Rights in re Funke and of the European Court of Justice in re Corbiau, E. C. Tax Review, Vol. 3, pp. 86– 90; P. J. Wattel, (1990), Mensenrechten en belastingen, NJCM Bulletin, pp. 250– 270. 28. M. Isenbaert, (2010), EC Law and the Sovereignty of Member States in Direct Taxation, IBFD Doctoral Series Nr. 19, Amsterdam, p. 199. 29. Ibid. p. 199, footnote 604 for reference to the jurisprudence. 30. ECJ, July 12, 1979, Commission of the European Communities vs. Federal Republic of Germany, Case 153/78, E.C.R. 1979, p. 2555 and prior judgments in the same line ECJ, December 15, 1976, Simmenthal SpA vs. Ministère des finances Italien, Case 35– 76, E.C.R. 1976, p. 1871; ECJ, October 5, 1977, Carlo Tedeschi vs. Denkavit Commerciale s.r.l., Case 5– 77, E.C.R. 1977, p. 1555; ECJ, October 12, 1978, John. Eggers Sohn & Co. vs. Freie Hansestadt Bremen, Case 13/78, E.C.R. 1978, p. 1935. S. Van Thiel, (2001), Free Movement of Persons and Income Tax 408 Notes

Law: The European Court in Search of Principles, IBFD Doctoral Series, p. 155 provides similar examples in other policy areas. 31. K. Lenaerts, (1990), Constitutionalism and the Many Faces of Federalism, American Journal of Comparative Law, Vol. 38, p. 220. 32. M. Isenbaert, (2010), EC Law and the Sovereignty of Member States in Direct Taxation, IBFD Doctoral Series Nr. 19, Amsterdam, p. 201. 33. See for an evaluation. Ibid. pp. 231– 690. 34. See in extenso on this matter: B. J. M. Terra and P. J. Wattel, (2012), European Tax Law, 6th Ed., Kluwer Law International, London, in particular part C, Chapters 17– 24. 35. A. Bal, (2014), Tax- Incentives: Ill- Advised Tax Policy or Growth Catalysts, European Taxation, Vol. 54, Issue 2– 3, pp. 66– 67. 36. See for more details on state aid in the context of tax affairs: C. Micheau, (2012), Fundamental Freedoms and State Aid Rules under EU Law: The Example of Taxation, European Taxation, Vol. 52, Issue 5, pp. 210– 215; and F. A. Engelen, (2012), State Aid and Restrictions on Free Movement: Two Sides of the Same Coin?, European Taxation, Vol. 52, Nr. 5, pp. 204– 209. 37. ‘Collide’ is the term used by Douma in S. C. W. Douma, (2011), Optimization and Tax Sovereignty and Free Movement, IBFD Doctoral Series, Nr. 21, IBFD, Amsterdam, pp. 31– 78. I would have preferred ‘coincide’, as they emerge jointly in their application without an absolute need that they (naturally) collide (to some degree or other). For the purpose of this work, the difference can be considered semantically and legally irrelevant. 38. The literature goes in all directions, from taking the position that the ECJ consistently respects national tax laws to the detriment of the internal market, to the application of the internal market laws acting as a steamroller against what is still a fiscal prerogative of the member states. 39. S. C. W. Douma, (2011), Optimization and Tax Sovereignty and Free Movement, IBFD Doctoral Series Nr. 21, IBFD, Amsterdam, pp. 31– 78. 40. See in detail: R. Alexy, (1985) Theorie der Grundrechte, Nomos- Verlagsgesellschaft, Baden- Baden; R. Alexy, (1985), Rechtsregeln und Rechtsprinzipien, Archiv für Rechts- und Sozialphilosophie, Beiheft, 25, pp. 13– 29; R. Alexy, (2002), A Theory of Constitutional Rights, Oxford University Press, trans. Julian Rivers, Oxford; R. Alexy, (2002), The Argument From Injustice: A Reply to Legal Positivism, Clarendon Press, trans. Bonnie Litschewski Paulson and Stanley L. Paulson, Oxford; R. Alexy, (2005), Balancing, Constitutional Review, and Representation, International Journal of Constitutional Law, Vol. 3, Issue 4, pp. 572– 581; A. R. Alexy, (2009), On Constitutional Rights to Protection, Legisprudence, Vol. 3, Issue 1, July 2009, pp. 1– 17; R. Alexy, (2009), Die Konstruktion der Grundrechte, in Laura Clérico and Jan- Reinard Sieckmann (eds.), Grundrechte, Prinzipien und Argumentationen: Studien zur Rechtstheorie Robert Alexys, Nomos, Baden- Baden, pp. 9– 19. 41. S. C. W. Douma, (2011), Optimization and Tax Sovereignty and Free Movement, IBFD Doctoral Series Nr. 21, IBFD, Amsterdam, Chapter 8, pp. 147– 292. 42. R. Nozick, (1974), Anarchy, State and Utopia, Oxford University Press, Oxford & New York, p. 169. 43. A. Smith, (1982), Lectures on Jurisprudence, Liberty Fund, Indianapolis, [1762– 1763], pp. 200– 221. 44. J. L. M. Gribnau, (2011), Fiscale ethiek: wederkerige verantwoordelijkheid voor de integriteit van het belastingrecht in Belastingen en ethiek, Preadviezen en bespreking Notes 409

preadviezen, Kluwer, Deventer, pp. 88 ff. (Geschriften van de Vereniging voor Belastingwetenschap Nr. 243). 45. This is not the first time in history that this has happened: See J. L. M. Gribnau, (2014), Vrijwillige belastingbetalingen, Nederlands Tijdschrift voor Fiscaal Recht 2014/818, pp. 1– 6. 46. P. Sloterdijk, (2010), Die nehmende Hand und die gebende Seite, Suhrkamp Verlag, Berlin, in particular pp. 140– 145. 47. J. M. Guéhenno, (2000), De toekomst van de vrijheid. Democratie in een gemodiali- seerde wereld, Lannoo, Tielt, pp. 80– 85. 48. J. Ober, (1989), Mass and Elite: Rhetoric, Ideology, and the Power by the People, Princeton University Press, Princeton, pp. 202– 204. 49. P. Sloterdijk, (2010), Die nehmende Hand und die gebende Seite, Suhrkamp Verlag, Berlin, Worauf beruht der Steuerstaat, pp. 135– 137. 50. Y. Litokis and D. M. Schizer, (2013), I Like to Pay Taxes: Taxpayer Support for Government Spending and the Efficiency of the Tax System, Tax Law Review, Vol. 66, Issue 179, pp. 180– 185. 51. R&D as a percentage of GDP is lower EU- wide compared to the rest of the world, but with an average of 1.2% of GDP in recent years The Netherlands is lagging, which is translating into a loss of competitiveness. 52. See in detail J. L. M. Gribnau, (2013), Belastingen als moreel fenomeen, Boom fiscale uitgevers, Den Haag. 53. See a contrario: H. van den Hurk, (2014), Starbucks versus the People, Bulletin for International Taxation, Vol. 68, Issue 1, pp. 27– 34. 54. J. L. M. Gribnau, (2013), Fair share en tax planning: Een moeilijk maar noodzake- lijk debat, in P. Kavelaars (ed.), Ongewenste belastingontwijking? De jacht naar een fair share, Fiscaal Economisch Instituut/EUR, Rotterdam, pp. 35– 54. J. L. M. Gribnau, (2013), Belastingen en ethiek: De ethische dimensie van tax planning, Nederlands Tijdschrift voor Fiscaal Recht, 2013/444, pp. 527– 548. The discussion about the ethical dimension of tax law triggers the need for a norm (i.e. which actions are good/bad, preferred/not- preferred, etc.). What makes the matter more complicated is that there are often multiple drivers behind a certain action which can be tax- related or not. A further question arising is the question of to what degree the legal rule and moral norms in tax laws can be (or are treatable as) separated. The fact that the former is enforceable and the latter is not is a different dimension of the same problem. See, for an attempt to development of a possible moral framework for analysis in this respect, C. Bruijsten, (2014), Belastingrecht en ethiek: een mogelijk denkkader, WFR 2014/580. 55. See P. H. J. Essers, (2014), International Tax Justice Between Machiavelli and Habermas, Bulletin for International Taxation, Vol. 68, Issue 2, pp. 54– 67. 56. According to some that seems unavoidable, although that conclusion can be questioned: Davies et al. highlight ‘Third, a good tax system should be structured to meet overall spending needs. Earmarking of revenues for particular purposes should be avoided. It is very difficult to justify linking spending on particular items to receipts from particular taxes … earmarking of revenues that does not impose a binding constraint on spending is empty rhetoric – an exercise in deceiving voters that their tax payments [control] government spending in a way which they simply will not …’, see: G. Davies, A. Dilnot, C. Giles, and D. Walton, (1993), Options for 1994: The Green Budget, IFS Commentary Nr. 40, Institute for Fiscal Studies, London, pp. 64– 65. 410 Notes

57. A. M. Jaime- Castillo, J. M. Echavarren, and J. Álvarez- Gálvez, (2013), Distributive Conflicts and Willingness to Pay for the Environment, Working Paper with reviews of past studies and a model for explanation for the emergence of a reverse pyramid in willingness to pay by the affluent part of society (affluent part more willing to pay for the environment that the low- income segment of society). The affluent part of society dislikes redistributive taxes, given that they are net losers from the redistribution game, while they support environmental taxes because the environment is a public good. This supports the overall understanding of a higher willingness to pay for public goods when there is a direct relation between the tax imposed and the maintenance of a public good. This phenomenon is absent when public goods are financed out of the general resources of the sovereign. Within the context of the Yale project on Climate Change Communication it was estimated how much an average US household would be willing to spend on reducing GHGs and more generally protect the environment: For a full review see: M. J. Kotchen, K. J. Boyl, and A. A. Leiserowitz, (2011), Policy- Instrument Choice and Benefit Estimates for Climate- Change Policy in the United States, NBER Working Paper Series Nr. 17539, October. An interesting next question to be answered would be if there is (or should be) a Lindahl effect in environmental taxes and other Pigovian taxes, i.e. a scaled tax per individual/household based on the marginal benefit they derive from a public good. The Lindahl equilibrium would then act as a variant of the Pareto optimum for public goods. It would trigger the additional question of how the behavior would evolve or modify the more the public good is global in nature (globalized). Other Pigovian applications and the pricing challenge can be found in: S. Gerking, M. Dickie, and M. Veronesi, (2014), Valuation of Human Health: An Integrated Model of Willingness to Pay for Mortality and Morbidity Risk Reductions, Journal of Environmental Economics and Management, Vol. 68, Issue 1, pp. 20– 45 which could be applied to fat taxes, syrup taxes, and the like; A. Hackbarth and R. Madlener, (2013), Willingness to Pay for Alternative Fuel Vehicle Characteristics: A Stated Choice Study for Germany, FCN Working Paper nr. 20/2013; M. Haddak, N. Havet, and M. Lefèvre, (2014), Willingness- to- Pay for Road Safety Improvements, Gate Working Paper, Nr. 1406; S. Navrud and J. Strand, (2013), Valuing Global Public Goods: A European Delphi Stated Preference Survey on Population Willingness to Pay for Amazon Rainforest Preservation, World Bank Policy Research Working Paper, Nr. 6637; regarding the uncertainty in the WTP for environmental taxes see R. A. Daziano and M. Achtnicht, (2013), Accounting for Uncertainty in Willingness to pay for Environmental Taxes, ZEW & Center for European Economic Research Discussion Paper, Nr. 13– 059; A. Wiencke, (2013), Willingness to Pay for Green Buildings – Empirical Evidence from Switzerland, Journal of Real Estate Sustainability, Vol. 5., pp. 111– 133. Further studies have been done with respect to green foods, shale gas extraction, and air quality, all pointing in the same direction within a certain range and accounting for local confounding factors. 58. For a contemporary analysis of the concept of fairness see C. Peters, (2014), ‘Fairness’ in het international belastingrecht: een Fata Morgana of een bespreek- bare lijn aan de horizon, Tijdschrift voor Fiscaal Ondernemingsrecht, Vol. 131, pp.1– 9; C. Peters, (2014), On the Legitimacy of International Tax Law, IBFD Doctoral Series Nr. 31, Amsterdam, pp. 82– 90. 59. O. Marres, (2012), Eerlijk delen in de fiscale jungle, Oratie, Sdu, Den Haag. Marres details the various sources of erosion of the income concept on both a domestic and an international level. A. C. Rijkers, (2013), Een fiscaal inkomensbegrip Notes 411

voor de 21st eeuw, Afscheidsrede, Prisma Print, Tilburg University. Rijkers demonstrates the vast amount of imperfections in our current concept of income for tax purposes. It should logically include everything that, when being consumed, would not reduce the amount of wealth possessed before the income was generated. See historically G. Schanz, (1896), Der Einkommensbegriff und die Einkommenssteuergesetze, Finanzarchiv 1896, Jg. 13, Bd. 1 and R. M. Haig, (1921), The Concept of Income – Economic and Legal Aspects, The Federal Income Tax, New York; H. C. Simons, (1938) Personal Income Taxation, The Definition of Income as a Problem of Fiscal Policy, The University of Chicago Press, Chicago. 60. For example the Common Consolidated Tax Base. 61. P. Pistone, (2014), Coordinating the Action of Regional and Global Players During the Shift from Bilateralism to Multilateralism in International Tax Law, World Tax Journal, Vol. 6, Issue 1, p. 5. 62. L. G. M. Stevens, (2008), Naar een solidaire participatiemaatschappij. Belastingbeginselen en fiscale instrumenten als concretiseringsmogelijkheden, Kluwer, Deventer, p. 79. 63. There are varying degrees of instrumentalism. The question is whether the dominant objective of a certain tax law is to achieve a certain pre- determined outcome; p. 22 in J. P. Boer, (2013), Sturende belastingheffer een monster? Juridische kanttekeningen bij fiscal instrumentalisme en ‘tax nudging’, Sdu Uitgevers, Den Haag. It ignores, however, that tax laws on average include multiple measures with often completely different objectives. 64. Ibid. pp. 36– 39. 65. For example Nota ‘Zicht op wetgeving’, Kamerstukken (Parliamentary Documents) II 1990/91, 22 008, Nrs. 1– 2. 66. J. P. Boer, (2013), Sturende belastingheffer een monster? Juridische kanttekeningen bij fiscal instrumentalisme en ‘tax nudging’, Sdu Uitgevers, Den Haag, p. 39. 67. V. Halberstadt en C. A. de Kam, (1976), Belastingpolitiek en inkomensverdeling, Kluwer, Deventer, p. 22. 68. H. J. Hofstra, (1979), Over Belastingbeginselen, WFR 1979/1213, p. 1216. He indicates ‘Ook indien sociale en economische maatregelen van financiële aard op doelmatigheidsoverwegingen via het belastingapparaat worden geleid, blijven zij materieel niet- fiscale lasten of subsidies, welke motivering buiten het fiscale vlak ligt, zodat zij ook geen element in de theorie van de belastingheffing kunnen vormen’, p. 1218. 69. W. Witteveen, (1996), De geordende wereld van het recht, Een inleiding, Amsterdam University Press, Amsterdam, pp. 326– 327: ‘Juist bij beleidsinstrumentele wetgeving kan niet altijd voldoende worden aangesloten bij het rechtsbewustzijn van de burger. Dat heeft een te geringe acceptatie van die normen door de justitiabelen tot gevolg’. 70. See also M. E. Oenema, (2014), ‘WFR Fiscaal Café 2014: de ondernemende ondernemer, WFR 2014/195. 71. J. L. M. Gribnau, (2012), Instrumentalisme en vrijheid, Nederlands Tijdschrift voor Fiscaal Recht, NTFR 2012/517, 8 maart 2012, Nr. 10, pp. 1– 8; L. L. Fuller, (1967), The Morality of Law, Yale University Press [1964], New Haven/London. 72. B. Z. Tamanaha, (2006), The Perils of Pervasive Legal Instrumentalism, Schoordijk Institute/Wolf Legal Publishers, Tilburg/Nijmegen, p. 66. 73. See in detail on legitimacy: A. K. J. M. van Steenbergen, (2013), Legitimiteit en fiscale rechtshandhaving, Juridische en sociaalwetenschappelijke aspecten, (diss.), Centrum voor kennis en communicatie, Belastingdienst. 412 Notes

74. See in detail: J. J. M. Jansen, (2012), Het is uit de hand gelopen: Over de te ver doorgeschoten instrumentalisering van het belastingrecht, Kluwer, Deventer; For an exploration of the underlying dynamics see J. L. M. Gribnau, (2013), Legislative instrumentalism vs. Legal Principles in Tax, Coventry Law Journal, Vol. 16, pp. 89– 109. 75. J. L. M. Gribnau, (2012), Vertrouwen, Legitimiteit en Belastingen, Tilburg University, Tilburg; J. L. M. Gribnau, (2013), Belastingen als moreel fenomeen: vertrouwen en legitimiteit in de praktijk, Boom Fiscale Uitgevers. 76. J. L. M. Gribnau, (2013), Legitieme belastingheffing: recht, governance en vertrouwen, Maandblad Belasting Beschouwingen (MBB), augustus 2013, Nr. 7/8, pp. 203– 216. 77. Ch. Parker and J. Braithwaite, (2003), Regulation, in P. Cane and M. Tushnet (eds.), The Oxford Handbook of Legal Studies, Oxford University Press, Oxford, p. 119; J. Pierre and B. G. Peters, (2000), Governance, Politics and the State, Macmillan, Basingstoke and London, p. 82. 78. J. P. Boer, (2013), Sturende belastingheffer een monster? Juridische kanttekeningen bij fiscaal instrumentalisme en ‘tax nudging’, Sdu Uitgevers, Den Haag. 79. C. R. Sunstein and R. H. Thaler, (2008), Nudge: Improving Decisions about Health, Wealth and Happiness, Yale University Press, New Haven & London. 80. J. P. Boer, (2013), Sturende belastingheffer een monster? Juridische kanttekeningen bij fiscaal instrumentalisme en ‘tax nudging’, Sdu Uitgevers, Den Haag, p. 56. But it also raises concern, as the executive state branch can overpower the regulator without proper oversight, pp. 76– 77. In any case proper oversight is required to safeguard principles such as proportionality, equality, transparency, and fair play. As tax judges cannot properly supervise (individual) tax nudges we are entering the field of public governance. 81. A. Chaudhuri, (2011), Sustaining Cooperation in Public Laboratory Goods Experiments: A Selective Survey of Literature, Experimental Economics, Vol. 14, Issue 1, pp. 23– 37. R. G. Cummings, J. Martínez- Vázquez, and M. McKee, (2001), Cross- Cultural Comparison of Tax Compliance Behavior, Georgia State University, Andrew Young School of Policy Studies, Working Paper Nr. 01- 3; D. D. Bobek, R. W. Roberts, and J. T. Sweeney, (2007), The Social Norms of Tax Compliance: Evidence from Australia, Singapore, and the United States, Journal of Business Ethics, Vol. 74, Issue 1, pp. 49– 64. 82. O. A. B. Torgler, (2007), Tax Compliance and Tax Morale: A Theoretical and Empirical Analysis, Edward Elgar, Cheltenham. 83. B. Herrmann, C. Thöni, and S. Gächter, (2008): Antisocial Punishment across Societies, Science, Vol. 319, Issue 5868, pp. 1362– 1367; M. Wenzel, (2004), An Analysis of Norm Processes in Tax Compliance, Journal of Economic Psychology, Vol. 25, pp. 213– 228. 84. C. Blackwell, (2007), A Meta- Analysis of Tax Compliance Experiments, International Center for Public Policy Working Paper Series at Andrew Young School of Policy Studies, Georgia State University. See for a full review of studies done in this field T. O, Weber, J. Fooken, and B. Hermann, (2014), Behavioral Economics and Taxation, EC Taxation Papers Series, Working Paper Nr. 41. 85. H. Hashimzade, G. D. Myles, and B. Tran- Nam, (2012), Application of Behavioural Economics to Tax Evasion, Journal of Economic Surveys, Online Version, doi:10.1111/j. 1467- 6419.2012.00733.x. 86. E. Kirchler, (2007), The Economic Psychology of Tax Behavior, Cambridge University Press, Cambridge, pp. 73 ff.; C. A. Schaltegger, (2010), Direct Taxation, Notes 413

Decentralization and Earmarked Taxation: An Institutional Framework to Foster Tax Compliance, Intertax 36, Vol. 10, pp. 427– 429; M. Wenzel, (2003), Tax Compliance and the Psychology of Justice: Mapping the Field, in V. Braithwaite (ed.), Taxing Democracy, Ashgate, Alderhot/Burlington, p. 51; L. L. Fuller, (1977), The Morality of Law, Yale University Press [1964], New Haven/London, p. 219. 87. See for example the earlier mentioned J. P. Boer, (2013), Sturende belastingheffer een monster? Juridische kanttekeningen bij fiscaal instrumentalisme en ‘tax nudging’, Sdu Uitgevers, Den Haag, par. 2.6, pp. 28– 30; but also A. Ogus, (1999), Nudging and Rectifying: the Use of Fiscal Instruments for Regulatory Purposes, Legal Studies, Vol. 19, pp. 245– 266 who distinguishes between rectifying taxes (internalizing external costs) and tax nudges (steering behavior to the degree that they reduce external costs). Combining both (i.e. double dividend) is problematic as they compete in their functioning given the budgetary function underlying (Pigovian) taxes, in particular when the elasticity of the good or service is high. This is often not the case, e.g. fossil fuels, alcohol, and tobacco. The non- budgetary function of those levies become marginal (see E. Aardema, (2006), Inkomenstenbelasting – een terublik, MBB 2006/5) and the legislator is then facing claims that the exercise is limited to taxing easy low- hanging fruit (I. J. J. Burgers and D. M. Hanema, (2011), Energiebelasting: Europa’s luchtverfrisser of melkkoe?, NTFR 2011/1645); H. R. J. Vollebergh, (2007), Pigou en zo. Over belastingen als milieubeleidsinstru- ment in Nederland, in C. L. J. Caminada (ed.), Belasting Met Beleid, Sdu Uitgevers, The Hague, pp. 189– 207; E. J. G. M. Stassen, A. Leder, and I. de Ridder, (2007), Ontmoediging in het fiscale belastinginstrumentarium, in C. L. J. Caminada (ed.), Belasting Met Beleid, Sdu Uitgevers, The Hague, pp. 21– 31 in particular pp. 23, 24 and 28. 88. Algemene rekenkamer, (1999), Belastingen als beleidsinstrument, The Hague, p. 12. 89. In the case of (globalized or globalizing) public goods. 90. Fuel taxes for example are not focused on discouraging modes of transport or mobility in a more general sense, but only the neutralization of an asymmetric cost pattern. 91. W. Kerber, (1999), Interjurisdictonal Competition within the European Union, Fordham International Law Journal, Vol. 23, pp. 217– 249. 92. D. Neumark and J. Muz, (2014), Business Climate, Growth and Economic Inequality, NBER Working Paper, Nr. 20260, July 10. 93. J. P. Boer, (2013), Sturende belastingheffer een monster? Juridische kanttekeningen bij fiscal instrumentalisme en tax nudging, Sdu Uitgevers, Den Haag. 94. See in detail on corporate taxation: G. Nicodème, (2009), Corporate Income Tax and Economic Distortions, EC Taxation Papers Series, Working Paper Nr. 15. 95. See for a broad overview on the topic: D. Prammer, (2011), Quality of Taxation and the Crisis: Tax Shifts from a Growth Perspective, EC Taxation Papers Series, Working Paper Nr. 29. 96. Treasury Select Committee, (2012), Principles of Tax Policy, Eight Report of Session 2010– 2012, H.C. 752, p. 11. 97. Å. Johansson, C. Heady, J. Arnold, B. Brys, and L. Vartia, (2008), Tax and Economic Growth, OECD Economics Department Working Paper Nr. 620, Paris, who examined the distortionary effect (based on the impact of GDP per capita) of a variety of taxes. They concluded that corporate income taxes are the most distortive followed by personal income taxes, consumption taxes and property taxes. See also: OECD, (2010), OECD Tax Policy Studies: Tax Policy Reform and Economic Growth, Working Paper Nr. 20. Corporate taxation, taxation on 414 Notes

production inputs (a.k.a. taxes on intermediate transactions) are most distortionary as they impact both the production (production inputs aren’t used in an optimal way as firms will adjust their behavior leading lower productivity and higher final prices), and consumption decision (consumers responding to higher output prices), knowledge that has been with us since the seminal work of Diamond et al.; See: P. A. Diamond and J. A. Mirrlees, (1971), Optimal Taxation and Public Production I and II: Production Efficiency, The American Economic Review, Vol. 61, Issue 1, pp. 8– 27 and 261– 278. See also in a broader context I. Crawford, M. Keen, and S. Smith, (2010), Value Added Taxes and Excises, in particular 4.2.2. The Structure of Indirect Taxation, in J. Mirrlees, S. Adam, T. Besley, R. Blundell, S. Bond, R. Chote, M. Gammie, P. Johnson, G. Myles, and J. Poterba (eds.), Dimensions of Tax Design, Oxford University Press, Oxford, pp. 283– 291. In a contemporary economic context this category includes, for example, a financial transaction tax, something concurred with by the aforementioned 2008 OECD report which indicates ‘it is always less distortionary to tax the income and services provided by assets than the transactions involved in acquiring or disposing of them’ (p. 21). This standpoint was validated in a cross- country analysis: see S. Acosta- Ormaechea and J. Yoo, (2012), Tax Composition and Growth: A Broad Cross- Country Perspective, IMF Working Paper nr. WP/12/257. They further reduce the overall rate of capital accumulation in the economy and hinder productivity as they distort relative factor prices, cause compliance costs, and hinder technology transfers and knowledge spillovers. In a recent report it was demonstrated that (increases of) indirect taxes are more distortionary (i.e. in their impact on economic growth) than other categories of taxes (at least in recessionary periods and when GDP is below its potential rate). That finding is in clear contrast with mainstream findings so far; see M. G. Attinasi and A. Klemm, (2014), The Growth Impact of Discretionary Fiscal Policy Measures, ECB Working Paper Series Nr. 1697, in particular pp. 14– 16 and recommended literature list (pp. 29– 30). What makes a broad- based shift problematic are equity considerations. In particular, consumption taxes are less distortionary and allow higher levels of employment to emerge. Nevertheless, they are also seen as regressive and redistributive, as they impact low earners disproportionately more than high- income earners. See a contrario: I. Correia, (2010), Consumption Taxes and Redistribution, American Economic Review, Vol. 100, pp. 1673– 1694. See in general on the matter of the less distortionary level of consumption taxes: EC, (2013), Tax Reforms in the EU Member States: Tax Policy Challenges for Economic Growth and Fiscal Sustainability, EC Taxation Papers Series, Working Paper Nr. 38. 98. A. Auerbach and J. Hines, (2001), Taxation and Economic Efficiency, NBER Working Paper, Mr. 8181, March, illustrate that painful consideration in an environment where economic growth is rare. 99. T. Piketty, (2014), Capital in the 21st Century, Harvard University Press, Cambridge, MA. See also his earlier works: C. Landais, T. Piketty, and E. Saez, (2011), Pour une révolution fiscale: Un impôt sur le revenu pour le XXIe siècle, Seuil, Paris. I have been intentionally ignoring the outcry following the release of the book, which mainly related to the time series analysis of the datasets and the accuracy of his conclusions in this respect. See Piketty’s response to the outcry: T. Piketty, (2014), Technical Appendix of the Book ‘Capital in the Twenty- First Century’ Appendix to Chapter 10. Inequality of Capital Ownership Addendum: Response to FT, May 28. I did so (ignore the outcry) given that his findings have been confirmed and even magnified by independent research published after Notes 415 his book was released, see: E. Saez and G. Zucman, (2014), The Distribution of US Wealth, Capital Income and Returns since 2013, UC Berkeley Working Paper. In a Dutch context it can be referred to the WRR report (WRR Verkenning 28 of June 4, 2014): M. Kremer, M. Bovens, E. Schrijvers, and R. Went, (2014), Hoe ongelijk is Nederland? Een verkenning van de ontwikkeling en gevolgen van economische ongelijkheid. Their findings seem to report a more modest income inequality for The Netherlands than Piketty (whose main focus is on the Anglo- American world). They further report that economic inequality mainly exists at the level of wealth formation and accumulation (and less at the level of income). See also in a Dutch context: V. Broers, (2014), Thomas Piketty’s kapitaal samengevat in Nederlands perspectief, Prometheus Bert Bakker, Amsterdam. As wealth is clotted income (often through revaluation of assets and much less based on past earnings/savings, see E. Khoman and M. Weale, (2006), The UK Savings Gap, National Institute Economic Review, Vol. 198, pp. 97– 111), it highlights the problematic comprehensive income definition under most income tax systems, which fails to sufficiently cover all aspects of wealth mutation, regardless of its origin: see R. Boadway, E. Chamberlain, and C. Emmerson, (2010), Taxation of Wealth and Wealth Transfers, in J. Mirrlees, S. Adam, T. Besley, R. Blundell, S. Bond, R. Chote, M. Gammie, P. Johnson, G. Myles, and J. Poterba (eds.), Dimensions of Tax Design, Oxford University Press, Oxford, pp. 737– 814 and R. Griffith, J. Hines, and P. Sørenson, (2010), International Capital Taxation, in J. Mirrlees, S. Adam, T. Besley, R. Blundell, S. Bond, R. Chote, M. Gammie, P. Johnson, G. Myles, and J. Poterba (eds.), Dimensions of Tax Design, Oxford University Press, pp. 914– 996. See also on this matter: T. Piketty and G. Zucman, (2013), Capital is Back: Wealth- Income Ratio’s in Rich Countries, 1700– 2010, CEPR Discussion Paper, Nr. DP9588, who already point to this issue extensively and explain Piketty’s later suggested wealth tax (infra). Within a European context similar inequality was recently observed; T. Y Mathä, A. Porpiglia, and M. Ziegelmeyer, (2014), Household Wealth in the Euro Area: The Importance of Intergenerational Transfers, Homeownership and Home Price Dynamics, ECB Working Paper Nr. 1692: They conclude that intergenerational transfers, homeownership, and home price appreciation account for more than half of the differences in inequality (difference between mean and median). That is disturbing, as going forward home price appreciation will no longer be supported by lowering market interest rates as it was in the past (leaving only demand supply corrections), and homeownership as such will no longer be fis- cally supported in most European countries as it is seen to be have contributed to house price bubbles in some EU countries in recent years. Although that can be questioned, it leaves intergenerational transfers as the core model of wealth generation. In that respect their findings come very close to Piketty’s 2014 analysis of patrimonial capitalism. For a more granular analysis see: L. Arrondel, M. Roger, and S. Savignac, (2014), Wealth and Income in the Euro Area: Heterogeneity in Households’ Behavior, ECB Working Paper, Nr. 1709; See for earlier confirmations of this aspect: T. Piketty, (2011), On the Long- Run Evolution of Inheritance: France 1820– 2050, Quarterly Journal of Economics, Vol. 126, pp. 1071– 1131 and E. Wollf and M. Gittleman, (2011), Inheritances and the Distribution of Wealth or Whatever Happened to the Great Inheritance Boom, BLS Working Paper Nr. 445; See also Ph. Vermeulen, (2014), How Fat is the Top Tail of the Wealth Distribution, ECB Working Paper Series, Nr. 1692. He points to an aspect that magnifies the tail end of the wealth curve, i.e. the non- responsiveness of the more affluent to surveys. 416 Notes

100. The European Commission, however, does not see material issues regarding the redistributive nature of income tax systems. At least, post- tax inequality has not been aggravated post- crisis in the EU, with notable variations across individual member states. However, time series expose the severe vulnerability of low income earners post- crisis; see EC, (2014), Tax Reforms in EU Member States, EC Taxation Papers Series, Working Paper Nr 48, pp. 108– 114. 101. Building on his earlier work: T. Piketty and E. Saez (2003), Income Inequality in the United States, 1913– 1998, Quarterly Journal of Economics, Vol. 118, Issue 1, pp. 1– 39. But no real return to the 19th century is expected. What is expected is patrimonial capitalism, but with (1) lower concentration of property at the top, (2) property that has ‘penetrated’ much more deeply into the middle classes, and with (3) labor incomes received by top managers and bankers which place them, alongside the ‘rentiers’, into the top 1%. Among the members of the top 1% ‘cohabit’ the ‘coupon- clipping rentiers’ and the ‘working rich’ – Piketty (2014), Chapter 18. Also earlier in E. Wolff and A. Zacharias, (2009), Household Wealth and the Measurement of Economic Well- Being in the United States, Journal of Economic Inequality, Vol. 7, Issue 2, pp. 83– 115. High income earning is not based on marginal productivity, but the product of a collusive agreement between themselves (high earners) and the boards (Piketty (2014), Chapter 9). He argues in favor of a wealth tax, i.e. ‘the role of “confiscatory” (marginal) taxation is not to garner revenue but to limit “socially unproductive” high incomes which are a waste, in the sense that they are not needed to make greater output forthcoming. Taxation is also needed to curb political power of the rich … lowering of top tax rates leads to an explosion of high salaries which in turn increases political influence – through funding of political parties, pressure groups and think tanks – of the social group that has most interest in maintaining such low rates’. We will address his work later in this chapter and how its findings can be incorporated in a comprehensive and holistic Pigovian tax model. 102. ‘Talk of meritocracy seldom fits the facts – more often it is a rhetorical ploy to legitimate existing inequalities’, T. Piketty, (2014), Save Capitalism from the Capitalists by Taxing Wealth, Financial Times (March 28). 103. J. D. Ostry, A. Berg, and C. G. Tsangarides, (2014), Redistribution, Inequality and Growth, IMF Staff Discussion Note SDN//14/02. 104. Their (Ostry et al.) contemporary work builds on earlier analysis. See A. Berg, and J. D. Ostry, (2011), Inequality and Unsustainable Growth: Two Sides of the Same Coin? IMF Staff Discussion Note 11/08, International Monetary Fund, Washington, DC; A. Berg, J. D. Ostry, and J. Zettelmeyer, (2012), What Makes Growth Sustained?, Journal of Development Economics, Vol. 98, Issue 2, pp. 149– 166. 105. J. D. Ostry, A. Berg, and C. G. Tsangarides, (2014), Redistribution, Inequality and Growth, IMF Staff Discussion Note SDN//14/02, pp. 15– 25. Despite the inherent limitations of a regression of the dataset, we can meaningfully assume that there is no trade- off between redistribution and growth. 106. K. Polanyi, (2001), The Great Transformation: The Political and Economic Origins of Our Time, 2nd Ed., Beacon Press, Boston, [1944], pp. 250– 260. 107. S. Gupta and M. Keen (eds.), (2014), Fiscal Policy and Income Inequality, IMF Policy Paper, January 23. 108. See , Ibid. pp. 15– 18, 36– 42. 109. E. Tsounta and A. I. Osueke, (2014), What is Behind Latin America’s Declining Income Inequality, IMF Working Paper, WP/14/124. Notes 417

110. Of which there is little to expect in the EU in coming years and therefore ruled out as a tool. 111. Gupta et al. observe as well that improving the access of lower- income groups to higher education and maintaining access to health services combined with (1) implementing progressive personal income tax (PIT) rate structures and (2) reducing regressive tax exemptions are key policy elements in the nexus of fiscal policy and economic inequality (Ibid. pp. 25– 36). 112. In the externality context to be discussed, international tax competition and the implication of facilitated tax and regulatory arbitrage can be considered a legally induced externality or spillover as the IMF coined it recently; See: IMF, (2014), Spillover Report, pp. 9– 10, 67– 73, 79– 80. 113. See, for example: R. S. Avi- Yonah, (2006), The Three Goals of Taxation, Tax Law Review, Vol. 60, Issue 3, pp. 1– 28. 114. I. Wallerstein, (2011), Historical Capitalism [1983], Verso, London/New York, pp. 53– 54. 115. W. Vermeend, R. van der Ploeg, en J. W. Timmer, (2008), Taxes and the Economy: A Survey on the Impact of Taxes on Growth, Employment, Investment, Consumption and the Environment, Edward Elgar, Cheltenham, pp. 35– 75. 116. See for extensive data on this matter: H. A. Holter, D. Krueger, and S. Stepanchuk, (2014), How Does Tax Progressivity and Household Heterogeneity Affect Laffer Curves, NBER Working Paper, Nr. 20688. 117. Suggested was a one- off minimum 10% tax on outstanding deposits. See in detail: IMF, (2013), Fiscal Monitor October 2013, Taxing Times, pp. 23– 50, World Economic and Financial Surveys. 118. For example: expensive surgery for someone with a terminal illness which at best will prolong his/her life by only weeks (ignoring the aspect of quality of life here). 119. It can also be a benefit; J. Buchanan and W. C. Stubblebine, (1962), Externality, Economica New Series, Vol. 29, Issue 116, pp. 371– 384. The distinction between private and societal interest is well understood for pecuniary externalities, but neglect of Buchanan and Stubblebine’s article Externality has left the same distinction widely unrecognized for non- pecuniary ones. If only a few parties on either side experience a relevant externality within Buchanan and Stubblebine’s relevant/irrelevant distinction, private interactions can appropriately internalize costs and benefits across the entire population and many externalities will fix themselves; see D. D. Haddock, (2003), Irrelevant Internalities, Irrelevant Externalities and Irrelevant Anxieties, Northwestern Law & Economics Research Paper Nr. 03- 16; See also: A. Maricano, (2010), Why Markets Do Not Fail. Buchanan on Voluntary Cooperation and Externalities, HOPE Center Working Paper, Nr. 2010- 05. For praise on Buchanan/Stubblebine & Coase position see J. Wiseman, (1963), Guidelines for Public Enterprise: A British Experiment, Southern Economic Journal, Vol. 30, Issue 1, pp. 39– 48, for criticism see S. Wellisz, (1964), On External Diseconomies and the Government- Assisted Invisible Hand, Economica, Vol. 31, Issue 124, pp. 345– 362. 120. The British economist Henry Sidgwick ( 1838– 1900) has been earmarked as the person who first conceptualized the term ‘externality’. Not surprisingly this conceptualization occurred in the later stage and aftermath of the second Industrial Revolution, when industrialization of economic activities and economies of scale created an impact with consequences for society as a whole (labor issues associated with factory production, inequality, antitrust concerns, noise and smoke pollution, and railroad regulation, among others). Other sources 418 Notes

highlight the work of Alfred Marshall (1842– 1924) and his work on externalities (Principles of Economics) as a driver behind Pigou’s work. See: A. C. Pigou in The Concise Encyclopedia of Economics, (2008), Library of Economics and Liberty, 2nd Ed., Liberty Fund, New York. 121. K. J. Arrow, (1969), The Organization of Economic Activity: Issues Pertinent to the Choice of Market versus Non- market Allocations, in Analysis and Evaluation of Public Expenditures: The PPP System, Joint Economic Committee of Congress, Washington, DC. 122. Most of his thinking on this matter relates back to his work ‘The Economics of Welfare’ (1920). See A. C. Pigou, (2013), The Economics of Welfare, Palgrave Macmillan, Basingstoke, Reprint. 123. R. H. Frank, (2013), Heads, You Win. Tails, You Win, Too, NY Times, Economic View, January 5. 124. Negative externalities, besides Pigovian taxes, can essentially be targeted through (1) command- and- control legislation which includes positive and negative covenants that indirectly target the externality and hope its emergence can be avoided, and (2) quantity regulation, of which the cap- and- trade model is the most commonly applied: the market can only produce a certain amount of externality- inducing behavior, which then, through certificates or licenses, can be traded among market participants. When being stretched a third instrument can be staged, being the already discussed (3) tax nudge; see in detail: B. Galle, (2014), Tax, Command or … Nudge. Evaluating the New Regulation, Texas Law Review, Vol. 92 (2013– 2014), pp. 838– 894. 125. And create a broader more stable revenue- generating tax base than in the case of a single or a few Pigovian taxes. 126. R. H. Frank, (2013), Heads, You Win. Tails, You Win, Too, NY Times, Economic View, January 5, rather than just tax drivers for buying heavy engine cars, he argues ‘We could tax drivers contributing to traffic congestion, for example, on the grounds that entering a crowded roadway causes delays to others. We could tax noise, carbon emissions and other specific forms of air and water pollution. Although some people would end up as losers under any single one of these measures, virtually everyone would come out ahead under a broad suite of Pigovian taxes’… ‘any single Pigovian tax is an attractive gamble for the average taxpayer, who would get a rebate equal to the amount she’d paid in tax and would benefit from the resulting reduction in harm. Under a collection of such taxes, the odds of being a net winner go up sharply. Only the minuscule minority who cause much more than average amounts of harm in almost every category might end up paying more total tax than before. And even those few would still be net winners, because of the corresponding reductions in harm’. 127. Pigou also argues the opposite: in case an industry produces a marginal social benefit, the individuals receiving the benefit have no incentive or obligation to pay for that service or good. 128. Also K. W. Kapp, (1950), The Social Cost of Private Enterprise, Harvard University Press, Cambridge, MA. 129. N. G. Mankiw, (2009), Smart Taxes: An Open Invitation to Join the Pigou Club, Eastern Economic Journal, Vol. 35, Issue 14, p. 15. 130. A. C. Pigou, (1954), Some Aspects of the Welfare State, Diogenes, Vol. 2, Issue 7, pp. 10. 131. As one needs to know precisely who is causing harm, where it is occurring, or how much it would cost each firm or individual to reduce the harmful activity, Notes 419

it therefore cannot suffice to have an estimate of total amount of an activity and the total social harm that results. 132. W. J. Baumol, (1972), On Taxation and the Control of Externalities, American Economic Review, Vol. 62, Issue 3, pp. 307– 322 in particular pp. 316– 320. 133. J. M. Buchanan, (1969), External Diseconomies, Corrective Taxes and Market Structure, American Economic Review, Vol. 59, Issue 1, pp. 174– 177; see infra in this subchapter. R. Coase relies heavily on voluntary negotiations which would lead to a Pareto optimum. He stays silent on what needs to happen when voluntary negotiations don’t occur (naturally); see infra in this subchapter and W. J. Baumol, (1972), On Taxation and the Control of Externalities, American Economic Review, Vol. 62, Issue 3, pp. pp. 320– 321. 134. P. Buchanen therefore critiques the Pigovian tradition that assumes competitive markets. Market structures are however critical for determining the welfare achieving ability of the Pigovian tradition; J.M. Buchanan, (1969), External Diseconomies, Corrective Taxes and Market Structure, American Economic Review, Vol. 59, Issue 1, p. 175 and J. Buchanan and W. C. Stubblebine, (1962), Externality, Economica New Series, Vol. 29, Issue 116, pp. 371– 384. 135. Also R. Coase argues in that direction; see below in this subchapter. 136. See K. Vaughn, (1980), Does it Matter That Costs are Subjective?, Southern Economic Journal, Vol. 46, Issue 3, pp. 702– 715, in particular 714– 715. 137. Ibid. pp. 702– 715. 138. I. Parry and K. Small, (2009), Should Urban Transit Subsidies Be Reduced?, American Economic Review, Vol. 99, Issue 3, pp. 700– 724; in their calculations they arrive at a cost of about US$10 per liter of gas for the Metropolitan London area. 139. I. Parry, D. Heinze, E. Lis, and S. Li, (2014), Getting Energy Prices Right: From Principle to Practice, IMF Publishing, Washington, DC. 140. Ibid. pp. 3– 5. 141. Ibid. p. 2. 142. OECD, (2012), Mortality Risk Valuation in Environment, Health and Transport Policies, Paris; See also recently: Interagency Working Group on the Social Cost of Carbon, (2013), Technical Update on the Social Cost of Carbon for Regulatory Impact Analysis, US Government, Technical Support Document. They arrive

at a social cost of US$35 per metric ton of emitted CO2. Other methodologies were developed for air pollution etc. by the IPCC; see Intergovernmental Panel on Climate Change (IPCC), (2013), Climate Change 2013: The Physical Science Basis, Contribution of Working Group I to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge University Press, Cambridge. 143. Which fits well from the perspective of limited information and enforcement capabilities of regulators and tax offices. 144. V. Fleischer, (2014), Curb Your Enthusiasm for Pigouvian Taxes (draft March 2014), accessible through ssrn.com; p. 4 demonstrates the complexities and possible errors when applying it to a food tax and obesity. Obesity creates higher healthcare and related (external) costs. But he argues: ‘At the individual level, however, where incentives change decisions, people are heterogeneous in their relationship between food choices and any external harm those choices may produce’. Increasing the food price by a uniform marginal amount could leave a certain individual who caused no harm to curb their spending, while the person who is at risk of causing harm does not reduce their consumption. 420 Notes

That would create a situation where a limited amount of food tax is raised (from the individual causing harm, but not on the other person, who is cutting back on consumption), while still not reducing the amount of social (external) cost. The degree to which this occurs depends on the elasticity of demand for the product. Relevant literature may be found in notes 9 and 10. 145. V. Fleischer, (2014), Curb Your Enthusiasm for Pigouvian Taxes, (draft March 2014), ssrn.com, in which he further acknowledges that the case of carbon taxes/emissions, where the assumption of uniform marginal social cost happens to be reasonable, obscures this common design flaw. 146. Regarding the behavioral (economics) aspect of Pigovian taxes: R. H. Thaler and C. R. Sunstein, (2009), Nudge: Improving Decisions About Health, Wealth, and Happiness, Penguin Books, London; B. Galle, (2012), The Tragedy of the Carrots: Economics and Politics in the Choice of Price Instruments, Stanford Law Review, Vol. 64, p. 797; O. Amir and O. Lobel, (2008), Stumble, Predict, Nudge, Columbia Law Review, Vol. 108, p. 2098 and M. R. Calo, (2013), Code, Nudge, or Notice?, University of Washington Legal Studies Research Paper Nr. 2013- 04. 147. V. Fleischer, (2014), Curb Your Enthusiasm for Pigouvian Taxes, (draft March 2014), ssrn.com, p. 2. 148. Fleischer, Ibid. engages in that thought experiment in footnote 12, p. 4, when highlighting ‘One may imagine one’s future self as the party external to one’s present self; cognitive limitations may lead us to discount the preferences of one’s future self excessively. The case for governmental intrusion into one’s personal choices, however, is considerably more challenging than in the case where an individual harms others.’ 149. Quantity regulation, of which the aforementioned cap- and- trade model is the most well- known example, has many of the same institutional characteristics as a corrective tax. In Europe, we are familiar with this model particularly through the European Emission Trading Scheme (EETS). 150. See further: R. I. Steinzor, (1998), Reinventing Environmental Regulation: The Dangerous Journey from Command to Self- control, Harvard Environmental Law Review, Vol. 22, p. 103; T. H. Tietenberg, (1990), Economic Instruments for economic Regulation, Oxford University Press, Oxford and R. L. Revesz, (1997), Environmental Regulation, Ideology, and the D.C. Circuit, Virginia Law Review, p. 1717. 151. V. Fleischer, (2014), Curb Your Enthusiasm for Pigouvian Taxes, (draft March 2014), ssrn.com, p. 3. 152. Ibid. p. 5. 153. Ibid. p. 6. He correctly argues that this aspect has been underemphasized due to the fact that Pigovian taxes have mostly been known and commented on from the perspective of carbon emission taxes, where there is thought to be little variation in marginal social cost. There is, in fact, some evidence that marginal social cost varies depending on the location of the source of emission. 154. L. Kaplow and S. Shavell, (2002), On the Superiority of Corrective Taxes to Quantity Regulation, American Law and Economy Review, Vol. 4, Issue 1, pp. 4– 5. 155. Fleischer refers to gun ownership in this respect (p. 7). 156. See on Pigovian taxes as a policy instrument: J. Wiener, (1999), Global Environmental Regulation: Instrument Choice in Legal Context, Yale Law Journal, Vol. 108, p. 677. More economic focus on the matter can be found in: M. L. Cropper and W. E. Oates, (1992), Environmental Economics: A Survey, Journal of Economic Literature, Vol. 30, Issue 675, p. 686 and M. Weitzman, Notes 421

(1974), Prices vs. Quantities, Review of Economic Studies, Vol. 41, p. 477 as well as L. Kaplow and S. Shavell, (2002), On the Superiority of Corrective Taxes to Quantity Regulation, American Law and Economics Review, Vol. 4, Issue 1, p. 1. 157. Pigovian taxes tend to compete naturally with instruments yielding similar objectives, i.e. command- and- control legislation, quantity regulation, and tax nudges. 158. See in recent times on the matter: D. N. Shaviro, (2003), Rethinking Tax Expenditures and Fiscal Language, Tax Law Review, Vol. 57, p. 187. E. Saez, (2004), The Optimal Treatment of Tax Expenditures, Journal of Public Economics, Vol. 88, p. 2657 and E. D. Kleinbard, (2010), The Congress Within the Congress: How Tax Expenditures Distort Our Budget and Our Political Processes, Ohio Northern University law Review, Vol. 36, p. 1. 159. V. Fleischer, (2014), Curb Your Enthusiasm for Pigouvian Taxes, (draft March 2014), ssrn.com, p. 8. On a more philosophical note he is very wary of relying too heavily on tax policy as an instrument for social change, an inclination he believes is too mainstream among scholars and public policy designers. He indicates: ‘Only where the policy goal is closely related to the measurement of income is a tax instrument likely to be optimal’ p. 8. There is no need to concur with this position. The tax administration (most likely with variations across different member states, depending in the design of the tax system they manage) for a wide variety of purposes has become accustomed to dealing with non- income-related datasets and their implications for the overall tax burden. The datasets involve often person- or family- related characteristics or disabili- ties, care- related features, housing conditions, and the like. Fleischer’s comment seems to leave the tax administration hanging out to dry, while they have proven to be very instrumental in linking non- income- related characteristics to a taxable position. See further also on this matter: J. D Wright and D. H. Ginsburg, (2012), Behavioral Law and Economics: Its Origins, Fatal Flaws, and Implications for Liberty, Northwestern University Law Review, Vol. 106, p. 1058. 160. A.C. Pigou, (2013), The Economics of Welfare, Palgrave Macmillan, Basingstoke [1920], p. 172. 161. Which he illustrates with a large and varied number of examples on pp. 185– 186 and 192– 193. 162. See also (including criticism): R. H. Coase, (1960), The Problem of Social Cost, Journal for Law and Economics, Vol. 3, Issue 1, pp. 1– 44. 163. The Coase theorem assumes that (a) individual property right are properly defined, (b) people behave rationally (at all times), and (c) transaction costs are minimal. 164. R. H. Coase, (1960), The Problem of Social Cost, Journal for Law and Economics, Vol. 3, Issue 1, p. 17, passim. He further sees disproportionate administrative issues: ‘In the standard case of a smoke nuisance, which may affect a vast number of people engaged in a wide variety of activities, the administrative costs might well be so high as to make any attempt to deal with the problem within the confines of a single firm impossible. An alternative solution is direct governmental regulation.’ 165. See further: G. Calabresi, (1968), Transaction Costs, Resource Allocation and Liability Rules- A Comment, Journal for Law & Economics, Vol. 11, p. 67; C. J. Dahlman, (1979), The Problem of Externality, Journal for Law and Economics, Vol. 22, Issue 1, pp. 141– 162; H. Demsetz, (1967), Toward a Theory of Property Rights, American Economic Review, Vol. 57, pp. 347– 359; H. Demsetz, (1966), 422 Notes

Some Aspects of Property Rights, Journal for Law and Economics, Vol. 9, pp. 61– 70; R. Cooter, (1982) The Cost of Coase, Journal for Legal Studies, Vol. 11, Issue 1, pp. 1– 33. 166. R. H. Coase, (1960), The Problem of Social Cost, Journal for Law and Economics, Vol. 3, Issue 1, ‘it will no doubt be commonly the case that the gain which would come from regulating the actions which give rise to the harmful effects will be less than the costs involved in Government regulation’ (p. 18). 167. Ibid. p. 19. ‘One complexity of this situation is the multiple local maxima, or the interchangeable best- case scenarios. It all depends on the numbers. If the cost of abating all smoke is more than the cost to move the neighbors out, the neighbors should move out and let the factory continue emitting smoke. On the other hand, if it costs less to abate the smoke than to move the neighbors, then the factory ought to pay the tax or buy the clean technology to provide clean air for the surrounding residents. Once the optimum solution is implemented, Coase argues that the tax should not change, regardless of changing circumstances. In this case, if a tax is imposed on the factory and some more neighbors move in, the factory tax should not increase’ (p. 20). 168. J. M. Buchanan and W. C. Stubblenbine, (1962), Externality, Economica, Vol. 29, Issue 116, pp. 371– 384; J. M. Buchanan, (1969), External Diseconomies, Corrective Taxes and Market Structure, American Economic Review, Vol. 59, Issue 1, pp. 174– 177. Although Coase and Buchanan both advocate a market- based solution to the externality problem, they vary meaningfully in their approach. Buchanan did not explain the efficiency of market mechanisms in the presence of externalities by using ‘heroic’ assumptions about transaction costs, as Coase did. He didn’t need those. Transaction costs play no role in the analysis proposed by Buchanan, who rather based his theory on a simple behavioral assumption: individuals’ willingness to pay for the goods they consume and for the external effects their consumption create. More precisely, Buchanan’s argument was twofold: first, externalities are not a major economic problem because, second, individuals are spontaneously ready to internalize the consequences of their actions on others; see A.Marciano, (2011), Ronald Coase, “The Problem of Social Cost” and The Coase Theorem: An anniversary cel- ebration, European Journal of Law and Economics, Springer, Vol. 31, Issue, p. 5. See also O. Davis and A. Whinston, (1962), Externalities, Welfare and the Theory of Games, Journal of Political Economy, Vol. 70, Issue 3, pp 241– 262 who take Buchanan’s thoughts further and question the effectiveness of Pigovian taxes in the presence of oligopoly. 169. H. Varian, (1994), A Solution to the Problem of Externalities When Agents are Well Informed, The American Economic Review, Vol. 84, Issue 5, pp. 1278– 1293; G. A. Marney, (1971), The Coase Theorem: A Reexamination, Quarterly Journal of Economics, Vol. 85, Issue 4, pp. 718– 723. 170. Hayek reiterates: ‘Perhaps even more instructive is the case of the late Professor A. C. Pigou, the founder of the theory of welfare economics- who at the end of a long life devoted almost entirely to the task of defining the conditions in which government interference might be used to improve upon the results of the market, had to concede that the practical value of these theoretical considerations was somewhat doubtful because we are rarely in a position to ascertain whether the particular circumstance to which the theory refers exist in fact in any given situation. Not because he knows so much, but because he knows how much he would have to know in order to interfere successfully, and because he knows Notes 423

that he will never know all the relevant circumstances, it would seem that the economist should refrain from recommending isolated acts of interference even in conditions in which the theory tells him that they may be sometimes beneficial.’ F. A. Hayek, (2014), The Market and Other Orders, Vol. 15, University of Chicago Press, [1963] Chicago/London, p. 226 based on his 1963 paper ‘The Economy, Science and Politics’. The neoliberal viewpoint is embedded in a certain paradigm, as R. E. Wagner highlighted: When the rule of law is accepted by consensus, the role of government becomes clear. Government has a constitutional duty to protect property rights and accordingly to manage its own affairs so that the unwanted costs are not imposed on citizens. When fundamental constitutional protections are compromised by the politics of expediency, we find ourselves at sea without an anchor. Instead of pleading for Pigovian solutions that compromise constitutional property rights protection, we should call for a constitutional order that minimizes the need for Pigovian approaches and maximizes the domain for Coasean bargaining (p. 149), See B. Yandle, (1998), Coase, Pigou and Environmental Rights, pp. 119– 153 and R. E. Wagner, (1998), The Constitutional Protection of Private Property, pp. 315– 337 both in P. J. Hill and R. E. Meiners (eds.), (1998), Who Owns the Environment, Rowman and Littlefield, Lanham, MD; See also T. L. Anderson and F. S. McChesney, (2003), Property Rights: Cooperation, Conflict and Law, Princeton University Press, Princeton, p. 281. 171. J. McClure and T. Watts, (2014), The Greatest Externality (N)ever Told, Ball State University Working Paper, who overall evaluate the shallow scholarly analysis of externalities and some of its peculiarities that have occurred in recent decades. 172. E. Bertacchino, (2008), Coase, Pigou and the Potato: Whither’s Farmers Rights, Ecological Economics, Vol. 68, pp. 183– 193; C. de Bartolome, (2007), Why is Pigou Sometimes Wrong? Explaining How Distortionary Taxation Can Cause Public Spending to Exceed the Efficient Level, University of Colorado at Boulder, Economics Department, Vol. 7, Issue 2, 2007. 173. M. A. Adler, (2013), The Pigou- Dalton- Principle and the Structure of Distributive Justice, Duke University School of Law Working Paper. 174. M. A. Clemens, (2014), A Case Against Taxes and Quotas on High- Skill Labor, Center for Global Development, Working Paper Nr. 363. 175. See for example in case of patent trolling: J. E. Bessen and B. J. Love, (2013), Make the Patent ‘Polluters’ Pay: Using Pigovian Fees to Curb Patent Abuse, California Law Review Circuit, Vol. 4, pp. 84– 91; see for a new emerging externality H. Kalai, (2014), From the Dividend Puzzle to the Corporate Paradox: The Problem of Stakeholder’s Externalities, Social welfare and the Limited Liability, Part I and II, Tel Aviv University – Buchmann Faculty of Law Working Paper, who refers to externalities caused by the ‘limited liability’ characterizing contemporary corporations. It creates inherent externalities imposed by investors on other groups of investors, on creditors, and on the public. These externalities create incentives for inefficient levels of investment and encourage business ventures which, from a social welfare perspective, are not desirable. 176. M. Greaker and K. Midttømme, (2014), Optimal Environmental Policy with Network Effects: Will Pigovian Taxes Lead to Excess Inertia, CESifo Working Paper Series, Nr. 4759, who demonstrate that the network effect can create an ‘externality multiplier effect’, whereby the polluter, for example, may cause more pollution that just its own. 424 Notes

177. H. J. Hovenkamp, (2009), The Coase Theorem and Arthur Cecil Pigou, Arizona Law Review, Vol. 51, pp. 633– 649. 178. H. J. Hovenkamp, (2014), Fractured Institutions and the Design of Legal Rules, University of Iowa Legal Studies Research Paper Nr. 14- 08, Iowa Law Review, Vol. 100, forthcoming. 179. W. J. Baumol, (1972), On Taxation and the Control of Externalities, American Economic Review, Vol. 3, p. 307; J. Nye, (2008), The Pigou Problem, The Cato Institute, Washington, DC, pp. 32– 36. 180. Baumol, Ibid. p. 319. 181. K. G. Maeler, (1974), Environmental Economics: A Theoretical Enquiry, Johns Hopkins University Press, Baltimore.; K. Arrow, B. Bolin, R. Costanza, P. Dasgupta, C. Folke, C. S. Holling, B.- O. Jansson, S. Levin, K.- G. Maler, C. Perrings, and D. Pimente, (1995), Economic Growth, Carrying Capacity, and the Environment, Ecological Economics, Vol. 15, p. 91; A. C. Fisher, (1981), Resource and Environmental Economics, Cambridge Surveys on Economic Literature, Cambridge University Press, Cambridge; M. L. Weitzman, (1974), Prices vs. Quantities, Review of Economic Studies, Vol. 41, Issue 5, pp. 477– 491; M. L. Weitzman, (1974), Free Access vs. Private Ownership as Alternative Systems for Managing Common Property, Journal of Economic Theory, Vol. 8, Issue 2, pp. 225– 232. 182. Weitzman’s (supra) basic finding was that price instruments were preferable when the marginal benefit schedule was relatively flat, so that mistakes about cost would create a large amount of deadweight loss. Quantity instruments would be favorable when the marginal cost schedule was relatively flat, so that mistakes about production levels would be costly. (Fleischer p. 13 footnote 55) 183. Weitzman, Ibid. pp. 13– 14. 184. Emissions taxes (or other instruments that involve the authorities setting a price for emissions) will on average get closer to the optimal outcome if marginal abatement costs increase with extra abatement more rapidly than marginal damage costs increase with extra emissions. Quantity instruments, such as emissions trading, will perform better if the reverse is true (i.e. if marginal damage costs are more steeply rising than the marginal costs of pollution abatement). 185. See also: W. Harrington and R. D. Morgenstern, (2004), Economic Incentives versus Demand- and- Control, Resources, Fall/Winter 2004, pp. 13– 17; A. L. Bovenberg, and L. H. Goulder, (2001), Environmental Taxation and Regulation, NBER Working Paper, Nr. 8458. Based on Weitzman line of thinking Roberts and Spence observe that a combination of price and quantity regulation may perform better under uncertainty than reliance solely on one or other approach, see M. Roberts and M. Spence, (1976), Effluent Charges and Licenses under Uncertainty, Journal of Public Economics, Vol. 5, pp. 193– 208. 186. W. J. Baumol and W. E. Oates, (1988), The Theory of Environmental Taxation, Cambridge University Press, Cambridge, pp. 103– 145. 187. K. Kosonen and G. Nicodème, (2009), The Role of Fiscal Instruments in Environmental Policies, EC Taxation Papers Series, Working Paper Nr. 19, p. 3. 188. L. Kaplow and S. Shavell, (2002), On the Superiority of Corrective Taxes to Quantity Regulation, American law and Economics Review, Vol. 4, Issue 1, pp. 7– 10. 189. V. Fleischer, (2014), Curb Your Enthusiasm for Pigouvian Taxes, (draft March 2014), ssrn.com, p. 13. Notes 425

190. See Fleischer, Ibid. pp. 14– 17 for a full review of suggested and/or implemented (and revoked) Pigovian taxes. On zoning issues M. J. White, (1979), Suburban Growth Controls: Liability Rules and Pigovian Taxes, Journal of Legal Studies, Vol. 8, pp. 207 ff. Regarding executive pay: D. I. Walker, (2013), Tax Response to the Executive Pay Problem, Boston University Law Review, Vol. 93, pp. 325 ff. Regarding traffic congestion: A. A. Walters, (1961), The Theory and Measurement of Private and Social Cost of Highway Congestion, Econometrica, Journal of the Econometric Society, Vol. 29, Issue 4, pp. 676– 699. 191. A. Bovenberg and R. A. de Mooij, (1994), Environmental Taxes and Labor- Market Distortions, European Journal of Political Economy, Vol. 10, Issue 4, pp. 655– 683; A. Bovenberg and F. van der Ploeg, (1994), Environmental Policy and the Labour Market in a Second- Best World, Journal of Public Economics, Vol. 55, pp. 349– 399; A. Bovenberg and F. van der Ploeg, (1996), Optimal Taxation, Public Goods and Environmental Policy with Involuntary Unemployment, Journal of Public Economics, Vol. 62, pp. 59– 83; A. Bovenberg and F. van der Ploeg, (1998), Consequences of Environmental Tax Reform for Unemployment and Welfare, Environmental and Resource Economics, Vol. 12, pp. 137– 150. 192. Making a fair assumption that the uncompensated wage elasticity of labor is positive. 193. I. W. H. Parry and W. E. Oates, (1998), Policy Analysis in the Second- Best World, Resources for the Future Discussions Paper Nr. 98- 48. 194. The tax interaction effect is the impact that a Pigovian tax (for example a carbon tax) will have on existing taxes and the overall tax burden. A Pigovian tax will increase (exacerbate) the overall burden as the reduction of the existing (inefficient) tax is on average lower than the price increase of goods and services that for example a carbon tax would have. The more inefficient the initial tax, the more severe the impact of a Pigovian tax later on. 195. K. Kosonen and G. Nicodème, (2009), The Role of Fiscal Instruments in Environmental Policies, EC Taxation Papers Series, Working Paper Nr. 19, pp. 4– 5. They indicate that certain studies support the idea that green tax reforms can improve employment and the quality of the environment at the same time, provided that the tax revenues are recycled in the form of reductions of the employers’ social security contributions (p. 5, footnotes 6 and 7). 196. Ibid. p. 6. 197. See for a detailed analysis: Ibid. Chapter 3, pp. 9– 13 and a possible decision tree. They also refer to VAT as a tax that is based on the sales of goods that are related to the externality rather than on the externality itself. As the tax bases of such instruments are imperfect proxies for the externality, they correct for the externality in an inefficient way compared to first- best instruments, a.k.a. imperfect externality- correcting taxes. It is imperfect, as VAT reduces consumption but not the potentially underlying harmful practice. 198. A. Auerbach, (1985), The Theory of Excess Burden and Optimal Taxation, in M. Feldstein and A. J. Auerbach (eds.), Handbook of Public Economics, Elsevier, Amsterdam, North- Holland, p. 86. The Ramsey rule suggests taxing those goods and services characterized with a low price elasticity as it would cause a lower excess burden (compared to taxing those products and services with a higher price elasticity. Those taxes, however, have limited or no behavioral or regulatory effect; see: F. P. Ramsey, (1927). A Contribution to the Theory of Taxation, Economic Journal, Vol. 37, pp. 47– 61. Mirrlees in his 2011 review (infra this section) argues in this context frequently regarding progressive income taxes for 426 Notes

specific subgroups (elderly, mother with young children) regarding the variation elasticity of labor supply when designing income taxes for the future; see also re excess burden: W. J. Corlett and D. C. Hague, (1953), Complementarity and the Excess Burden of Taxation, Review of Economic Studies, Vol. 21, pp. 21– 30. 199. A. Sandmo, (1975), Optimal Taxation in the Case of Externalities, Working Paper, Norwegian School of Economics and Business Administration, Bergen. 200. A. Bovenberg and R. A. de Mooij, (1994), Environmental Levies and Distortionary Taxation, American Economic Review, Vol. 84, Issue 4, pp. 1085– 1089; A. Bovenberg and R. A. de Mooij, (1994), Environmental Taxes and Labor- Market Distortions, European Journal of Political Economy, Vol. 10, pp. 655– 683. 201. A. Bovenberg and L. H. Goulder, (1996), Optimal Environmental Taxation in the Presence of Other Taxes: General- Equilibrium Analyses, The American Economic Review, Vol. 86, Issue 4, pp. 985– 1000. 202. I. W. H. Parry and W. E. Oates, (1998), Policy Analysis in the Second- Best World, Resources for the Future Discussions Paper Nr. 98- 48. 203. S. E. West and R. C. Williams III, (2004), Empirical Estimates for Environmental Policymaking in the Second- Best Setting, NBER Working Paper, Nr. 10330. 204. Baumol and Oates suggest, instead, an approach which lets the environmental targets (e.g. in terms of the amount of emissions reduction) be determined by the political process (instead of optimizing) and sets the tax in such a way as to reach the pre- determined target at minimum cost. Such a tax would be cost- effective, as it would equate marginal abatement costs across the potential options and actors of abatement, and thus ensure the efficient allocation of abatement effort in the economy, as well as providing long- term incentives for pollution reduction through technological improvements; see: W. J. Baumol and W. E. Oates, (1988), The Theory of Environmental Taxation, Cambridge University Press, Cambridge, pp. 45– 89. 205. S. Davies, (2002), Waste Management Multinationals, Mimeo, Public Services International Research Unit (PSIRU), School of Computing and Mathematical Sciences, University of Greenwich, London. 206. M. David and B. Sinclair- Desgagné, (2005), Environmental Regulation and the Eco- Industry, Journal of Regulatory Economics, Vol. 28, Issue 2, pp. 141– 155. 207. Under a non- perfect competition market the optimal emission tax needs in general to adjust to the polluters’ and the abatement suppliers’ relative market power. It may happen, for instance, that the distortions respectively present on the product and the abatement markets offset each other to the point that the optimal emission tax turns out to be the one prescribed initially by Pigou; see: A.- D. Nimubona and B. Sinclair- Desgagné, (2007), The Pigovian Tax Rule in the Presence of an Eco- Industry, Journal of Regulatory Economics, Vol. 28, Issue 2, pp. 141– 155. Their article showed that taxes targeting polluting emissions must adjust to the relative market power of environment firms (on the abatement market) and polluters (on both the final good and the abatement markets). All things equal, a relatively more concentrated and powerful eco- industry warrants higher emission taxes. The impact of more complex and realistic industry structures – with endogenous entry and exit, or privately informed and heterogeneous environment firms, for example – on Pigovian taxes and environmental regulation in general remains to be explored. 208. S. Chugh, (2014). A Short Course in Representative-Agent Macroeconomics, MIT Press, Cambridge, MA. Notes 427

209. B. Jacobs and R. A. de Mooij, (2015), Pigou Meets Mirrlees: On the Irrelevance of Tax Distortions for the Second- Best Pigouvian Tax, Journal of Environmental Economics and Management, forthcoming. 210. B. Jacobs, (2013), The Marginal Cost of Public Funds is one at the Optimal Tax System, Working Paper, Tinbergen Institute. 211. D. W. Carlton and G. C. Loury, (1980), The Limitations of Pigouvian Taxes as a Long- Run Remedy for Externalities, Quarterly Journal of Economics, Vol. 95, Issue 3, pp. 559– 566. 212. R. E. Kohn, (1986), The Limitations of Pigouvian Taxes as a Long- Run Remedy for Externalities, Quarterly Journal of Economics, Vol. 101, Issue 3, pp. 625– 630. 213. D. W. Carlton and G. C. Loury, (1986), The Limitations of Pigouvian Taxes as a Long- Run Remedy for Externalities: An Extension of Results, Quarterly Journal of Economics, Vol. 101, Issue 3, pp. 631– 634. 214. S. Barrios, J. Pycroft and B. Saveyn, (2013), The Marginal Cost of Public Funds in the EU: The Case of Labour Versus Green Taxes, EC Taxation Papers Series, Working Paper Nr. 35. Their results suggest that a green taxes- oriented fiscal consolidation would be preferred to a labor tax- oriented one (assuming that both tax increases would yield the same tax revenues). In addition, the efficiency losses associated with labor taxes are also likely to be greater when labor markets are less flexible (from an efficiency-wage perspective), a result also found to a small extent for green taxes. This raises the possibility that undertak- ing structural reforms (especially in the labor market) would help to minimize the efficiency losses entailed by tax-driven fiscal consolidations. 215. D. Fullerton and G. E. Metcalf, (1997), Environmental Taxes and the Double- Dividend Hypothesis: Did You Really Expect Something for Nothing? NBER Working Papers, Nr. 6199, pp. 6– 13, 20– 26, 42. For an analysis of the specific challenges pp. 26– 34. 216. A. L. Bovenberg and R. A. de Mooij, (1994), Environmental Levies and Distortionary Taxation, The American Economic Review, Vol. 84, Issue 4, pp. 1085– 1089 in particular pp. 1088– 1089 for the optimal pollution tax model after they reviewed the first- best model: pp. 1086– 1087. See also: A. L. Bovenberg and L. H. Goulder, (1996), Optimal Environmental Taxation in the Presence of Other Taxes: General Equilibrium Analysis, American Economic Review, Vol. 86, Issue 4, pp. 985– 1000; L. H. Goulder, (1995), Environmental Taxation and the Double Dividend: A Reader’s Guide, International Tax and Public Finance, Vol. 2, pp. 157– 183. 217. R. H. Frank, (2013), Heads, You Win. Tails, You Win, Too, NY Times, Economic View, January 5. 218. A. L. Bovenberg and R. A. de Mooij, (1994), Environmental Levies and Distortionary Taxation, The American Economic Review, Vol. 84, Issue 4, pp. 1085– 1089, in particular pp. 1085– 1087 for the set- up of their analysis. See also: A. L. Bovenberg and L. H. Goulder, (1996), Optimal Environmental Taxation in the Presence of Other Taxes: General Equilibrium Analysis, American Economic Review, Vol. 86, Issue 4, pp. 986– 989. For their analysis where in the second- best scenario the level of optimal tax departs from (i.e. will be lower than) the Pigovian externality neutralizing rate: pp. 991– 994. 219. See for a very good overview of the evolution per category for all countries in the EU: Eurostat, (2014), Taxation Trends in the European Union- 2014 edition, (DOI): 10.2778/33696. 428 Notes

220. L. H. Goulder, I. W. H. Parry, R. C. Williams III and D. Burtrow, (1999), The Cost- Effectiveness of Alternative Instruments for Environmental Protection in a Second- Best Setting, Journal of Public Economics, Vol. 72, pp. 329– 360. Their paper ‘employs analytical and numerical general equilibrium models to examine the costs of achieving pollution reductions under a range of environmental policy instruments in a second- best setting with preexisting factor taxes’. They find that the ‘presence of distorting taxes raises the costs of pollution abatement under each instrument relative to its costs in a first- best world. This extra cost is an increasing function of the magnitude of preexisting tax rates. In both first- and second- best settings, the cost differences across instruments depend importantly on the extent of pollution abatement under consideration. Total abatement costs differ markedly at low levels of abatement’. 221. D. Fullerton (1997), Environmental Levies and Distortionary Taxation: Comment, The American Economic Review, Vol. 87, Issue 1, pp. 245– 251, in particular pp. 249– 250 (regarding the relationship between subsidy and environmental tax), and 250– 251 ( second-best normalizations). 222. D. Fullerton and G. E. Metcalf, (1997), Environmental Taxes and the Double- Dividend Hypothesis: Did You Really Expect Something for Nothing?, NBER Working Papers, Nr. 6199, pp. 42, passim. 223. L. H. Goulder, (1995), Environmental Taxation and the Double- Dividend: A Reader’s Guide, ITPF, Vol. 2, Issue 2, pp. 157– 183. 224. L. H. Goulder, I. W. H. Parry, and D. Burtraw, (1997), Revenue- Raising Versus Other Approaches to Environmental Protection: The Critical Significance of Preexisting Tax Distortions, Rand Journal of Economics, Vol. 28, Issue 4, pp. 708– 731. 225. W.- L. Chou and C.- H. Huang, (2012), Dividends of Environmental Tax with Endogenized Time and Medical Expenditures, Paper Presented at the International Conference on Economic Modeling – EcoMod2012, Seville, Spain, July 4– 6, 2012. 226. See also: M. Blom, D. Nelissen, and M. Smit, (2013). Is fiscale vergroening goed voor de economie?, Delft, CE Delft. 227. As argued by Jacobs et al., in the case of an optimal tax starting point the neutralization of the externality and the reduction of the redistributive effect of labor taxes cancel each other out. 228. R. Schöb, (2003), The Double Dividend Hypothesis of Environmental Taxes: a Survey, Working Paper, Otto- von- Guericke- University, Magdeburg (also as CESifo Working Paper Series, Nr. 946, CESifo Group Munich). 229. L. Goulder, (1995), Effects of Carbon Taxes in an Economy with Prior Tax Distortions: An Intertemporal General Equilibrium Analysis, Journal of Environmental Economics and Management, Vol. 29, pp. 271– 297. 230. It is estimated that the excess burden for every dollar in income tax revenues raised is around 20– 50 cents; see: D. Fullerton, A. Leicester, and S. Smith, (2008), Environmental Taxes, Mirrlees Review, pp. 424– 547. 231. It will depend on the complementarity of the object of the Pigovian tax, with ‘leisure time’ as the equivalent of reduced labor supply; see for example: I. Parry, (1998), The Double Dividend: When You Get it and When You Don’t, Resources for the Future, Washington, DC. When the Pigovian object is more complemen- tary with leisure time than other goods or services and the Pigovian object is not taxed yet (in an optimal way) the second dividend can emerge. 232. R. Schöb, (2003), The Double Dividend Hypothesis of Environmental Taxes: A Survey, Otto- von- Guericke- University Working Paper, Magdeburg. Notes 429

233. The actual question is whether under a similar output a tax system with high Pigovian taxes and lower labor taxes can generate more employment than a tax system with high labor taxes and low or no Pigovian taxes. 234. C. Carraro, M. Galeotti, and M. Gallo, (1996), Environmental Taxation and Unemployment: Some Evidence on the Double Dividend Hypothesis in Europe, Journal of Public Economics, Vol. 62, pp. 141– 181; D. Fullerton, A. Leicester, and S. Smith, (2008), Environmental Taxes, Mirrlees Review, pp. 424– 547. 235. See in detail: A. J. Auerbach and J. R. Hines, Jr., (2002), Taxation and Economic Efficiency, A. J. Auerbach and M. Feldstein (eds.), Handbook of Public Economics, 1st Ed., Elsevier, Amsterdam, Vol. 3, Chapter 21, pp. 1347– 1421. 236. M. Feldstein, (2006), The Effect of Taxes on Efficiency and Growth, NBER Working Paper, Nr. 12201, in particular pp. 5– 11. 237. See in recent times: M. P. Devereux, L. Liu, and S. Loretz, (2014), The Elasticity of Corporate Taxable Income: New Evidence from UK Tax Records, American Economic Journal, Economic Policy, Vol. 6, Issue 2, pp. 19– 53; J. Creedy and N. Gemmell, (2013), Measuring Revenue Responses to Tax Rate Changes in Multi- Rate Income Tax Systems: Behavioural and Structural Factors, International Tax and Public Finance, Vol. 20, Issue 6, pp. 974– 991; D. le Maire and B. Schjerning, (2013), Tax Bunching, Income Shifting and Self- Employment, Journal of Public Economics, Vol. 107, pp. 1– 18; H. J. Kleven, C. Landais, E. Saez, and E. Schultz, (2014), Migration and Wage Effects of Taxing Top Earners: Evidence from the Foreigners’ Tax Scheme in Denmark, The Quarterly Journal of Economics, Vol. 129, Issue 1, pp. 333– 378; J. J. Andersen, (2012), Costs of Taxation and the Size of Government, Public Choice, Vol. 153, Issue 1– 2, pp. 83– 115; I. Claus, J. Creedy, and J. Teng, (2012), The Elasticity of Taxable Income in New Zealand, Fiscal Studies, Vol. 33, Issue 3, pp. 287– 303; S. Bach, G. Corneo, and V. Steiner, (2012), Optimal Top Marginal Tax Rates Under Income Splitting For Couples, European Economic Review, Vol. 56, Issue 6, pp. 1055– 1069; R. Boadway and J.- F. Tremblay, (2012), Optimal Income Taxation and the Labour Market: An Overview, CESifo Economic Studies, Vol. 59, Issue 1, pp. 93– 148; E. Saez, J. Slemrod, and S. H. Giertz, (2012), The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review, Journal of Economic Literature, Vol. 50, Issue 1, pp. 3– 50; D. Powell and H. Shan, (2012), Income Taxes, Compensating Differentials, and Occupational Choice: How Taxes Distort the Wage- Amenity Decision, American Economic Journal: Economic Policy, Vol. 3, Issue 4, pp. 224– 247; S. Kunieda, (2012), New Optimal Income Tax Theory and Japan’s Income Tax System, Japanese Economy, Vol. 39, Issue 4, pp. 60– 78; R. Boadway, (2011), Viewpoint: Innovations in the Theory and Practice of Redistribution Policy, Canadian Journal of Economics/Revue canadienne d’économique, Vol. 44, Issue 4, pp. 1138– 1183; R. Blundell, (2011), Viewpoint: Empirical Evidence and Tax Policy Design: lessons from the Mirrlees Review, Canadian Journal of Economics/Revue canadienne d’économique, Vol. 44, Issue 4, pp. 1106– 1137; V. Lipatov, (2012), Corporate Tax Evasion: the Case for Specialists, Journal of Economic Behavior & Organization Elsevier, Vol. 81, Issue 1, pp. 185– 206; R. Chetty, J. N. Friedman, T. Olsen, and L. Pistaferri, (2011), Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records, The Quarterly Journal of Economics, Vol. 126, Issue 2, pp. 749– 804; J. E. Anderson and W. Martin, (2011), Costs of Taxation and Benefits of Public Goods with Multiple Taxes and Goods, Journal of Public Economic Theory, Vol. 13, Issue 2, pp. 289– 309 and S. H. Giertz, (2010), The Elasticity of Taxable Income During 430 Notes

the 1990s: New Estimates and Sensitivity Analyses, Southern Economic Journal, Vol. 77, Issue 2, pp. 406– 433. 238. M. Feldstein, (1999), Tax Avoidance And The Deadweight Loss Of The Income Tax, The Review of Economics and Statistics, Vol. 81, Issue 4, pp. 674– 680; E. M. Engen and J. Skinner, (1996), Taxation and Economic Growth, NBER Working Paper Nr. 5826, M. Feldstein, (2008), Effects of Taxes on Economic Behavior, The National Tax Journal, Vol. LXI, Issue 1, March, pp 131– 139, also as NBER Working Paper, Nr. 13745; J. Slemrod, (1991), Optimal Taxation and Optimal Tax Systems, Journal of Economic Perspectives, Vol. 4, Nr. 1, pp. 157– 178; A. J. Auerbach and J. R. Hines, Jr., (2001), Perfect Taxation with Imperfect Competition, NBER Working Paper Nr. 8138. 239. They incorporate non- linear taxation into this setting and estimate the structural parameters of the model using employer– employee register- based data for the full Danish population of workers and workplaces for the years 2004– 2006. See C. T. Kreiner, J. R. Munch, and H. J. Whitta-Jacobsen, (2015), Taxation and the Long Run Allocation of Labor: Theory and Danish Evidence, Journal of Public Economics, Vol. 127, pp. 74– 86. 240. G. Nicodème, (2009), Corporate Income Tax and Economic Distortions, EU Taxation Papers, Nr. 15. 241. M. Feldstein, (1999), Tax Avoidance and the Deadweight Loss of the Income Tax, The Review of Economics and Statistics, Vol. 81, Issue 4, pp. 674– 680. 242. R. Chetty, (2009), Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance, American Economic Journal: Economic Policy, Vol. 1, Issue 2, pp. 31– 52. 243. Supra, M. Feldstein, (1999), Tax Avoidance and the Deadweight Loss of the Income Tax, The Review of Economics and Statistics, Vol. 81, Issue 4, pp. 674– 680. 244. Supra, T. Piketty , (2014), Capital in the 21st Century, Harvard University Press, Cambridge MA. 245. T. Piketty, E. Saez, and S. Stantcheva, (2014), Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities, American Economic Journal: Economic Policy, Vol. 6, Issue 1, pp. 230– 271. This paper was originally published in 2011 as NBER Working Paper Nr. 17616. 246. The tension between those two types of policy instruments is examined in the paper: M. Schuerhoff, H.- P. Weikard, and D. Zetland, (2013), The Life and Death of the Dutch Groundwater Tax, Water Policy, Vol. 15, Issue 6, pp. 1064– 1077. Although the national groundwater tax was revoked at the end of 2011, there are some interesting findings. They examine the Dutch national groundwater tax, a ‘green’ tax that promised to reduce distortions by simultaneously reducing the income tax burden and improving environmental outcomes. They find no evidence of these impacts. Instead, they see that the groundwater tax increased distortions by taxing a narrow base (a few drinking- water companies reliant on raw groundwater) and interfering with groundwater management programs funded by an existing provincial groundwater fee. 247. See in detail: J. Mirrlees, S. Adam, T. Besley, R. Blundell, S. Bond, R. Chote, M. Gammie, P. Johnson, G. Myles, and J. Poterba, (2011), The Mirrlees Review: Conclusions and Recommendations for Reform, Fiscal Studies, Vol. 32, Issue 3, pp. 331– 359; The full version of their reporting (two volumes) can be found at www.ifs.org.uk/mirrleesReview; see further J. Mirrlees et al., (2012), The Mirrlees Review: A Proposal for Systematic Tax Review, National Tax Journal, Vol. 65, Issue 3, pp. 655– 684 and A. J. Auerbach, (2012), The Mirrlees Review: A U.S. Perspective, National Tax Journal, Vol. 65, Issue 3, pp. 685– 708. Notes 431

248. N. G. Mankiw, (2009), Smart Taxes: An Open Invitation to Join the Pigou Club, Eastern Economic Journal, Vol. 35, pp. 14– 23. 249. As for example the U.S. Earned Income Tax Credit tries to achieve. 250. M. Friedman, (1987). The Case for the Negative Income Tax, in K. Leube (ed.), The Essence of Friedman, Hoover Institution Press, Stanford, pp. 57– 68. M. Friedman, (2002), Capitalism and Freedom, Fortieth Anniversary Edition, University of Chicago Press, Chicago, pp. 192– 194. 251. J. A. Mirrlees, (1971), An Exploration in the Theory of Optimal Income Taxation, Review of Economic Studies, Vol. 38, pp. 175– 208. E. Saez, (2001), Using Elasticities to Derive Optimal Income Tax Rates, Review of Economic Studies, Vol. 68, pp. 205– 229. 252. B. Jacobs and R. A. de Mooij, (2013), Pigou Meets Mirrlees: On the Irrelevance of Tax Distortions for the Second- Best Pigouvian Tax, Working Paper, Journal of Environmental Economics and Management, forthcoming, ‘Their model differs from the representative- agent models in two critical ways. First, individuals are heterogeneous in their earnings ability, which is private information. The optimal- tax problem is second best as the government cannot use individualized lump- sum taxes to redistribute income from high- ability to low- ability agents. Second, in contrast to representative- agent models, the government has always access to a non- individualized lump- sum tax, which is a non- distortionary marginal source of public finance and has a marginal cost of public funds (MCF) equal to one in the optimum. They show that the MCF is then equal to one for all distortionary tax instruments, since the MCF for distortionary taxes must be equal to the MCF for non- distortionary taxes. Hence, income taxes not only create deadweight losses due to distortions in the labor market, but also welfare gains due to a more equal income distribution. At the optimal tax system, these two effects on welfare exactly offset each other.’ 253. Also the Atkinson and Stiglitz model (1976), infra. 254. Lump- sum taxes are those characterized by a fixed amount regardless of circumstances and conditions. The marginal tax rate is therefore zero in those cases. Lump-sum taxes are characterized by ‘regressivity’: the lower the income, the greater the fixed amount will weigh on the taxpayer. 255. F. Hoffmann, R. Inderst, and U. Moslener, (2013), Taxing Externalities Under Constraint, MPRA Paper. 256. See: Mustafa Emirbayer and Ann Mische, (1998), What is Agency?, The American Journal of Sociology, Vol. 103, Issue 4, pp. 962– 1023. 257. H. Cremer, F. Gahvari, and N. Ladoux, (1997), Externalities and Optimal Taxation, Working Paper. 258. W. Baumol and W. Oates, (1975), The Theory of Environmental Policy: Externalities, Public Outlays, and the Quality of Life, Prentice- Hall, Englewood Cliffs, NJ; A. M. Freeman III, (1983), Depletable Externalities and Pigouvian Taxes, in Freeman, Air and Water Pollution Control: A Benefit- Cost Assessment, Wiley & Sons, Hoboken; P. W. J. M. Bird, (1987), The Transferability and Depletability of Externalities, Journal of Environmental Economics and Management, Vol. 14, pp. 54– 57. 259. One can decide not to live near a highway or in the surroundings of an airport, not to consume alcohol or tobacco, etc. 260. R. Aigner, (2013), Environmental Taxation and Redistribution Concerns, Working Paper. In welfare economics ‘first- best’ and ‘second best’ refer to situations or products/techniques when either all (first- best) optimally conditions can be satisfied or one or more optimally conditions (Pareto efficiency) cannot be satisfied ( second- best). 432 Notes

261. K. Kosonen, (2012), Regressivity of Environmental Taxation: Myth or Reality?, EC Taxation Papers Series, Working Paper Nr. 32. 262. European Environmental Agency, (2006), Using the Market for Cost- Effective Environmental Policy. Market- Based Instruments in Europe. EEA Report no 1/2006; Copenhagen Economics, (2008), Reduced VAT for Environmentally Friendly Products, Final report. The recycling of tax revenues through the reductions of income taxes or social security contributions (assumed in the above studies) would, however, considerably mitigate the regressive impact of energy taxation, and completely reverse it, if the tax cuts boost employment sufficiently to increase the disposable income of the households at the low end of the income scale. Using targeted tax credits or subsidies in combination with taxes is also an effective approach to compensate the low- income households for the impact of higher energy taxes. Regulatory instruments, which would merely impose higher standards on heating equipment, but would not generate revenues, would not offer the same possibility for compensatory measures. 263. D. Fullerton, (2008), Distributional Effects of Environmental and Energy Policy, An Introduction, NBER Working Paper, Nr. 14241. D. Fullerton, (2010), Six Distributional Effects of Environmental Policy, CESifo Working paper, Nr. 3299; D. Fullerton and G. E. Metcalf, (2002), Tax incidence, in A. J. Auerbach and M. Feldstein, (eds.), Handbook of Public Economics, Vol. 4, Elsevier, Amsterdam, pp. 1787– 1872; G. E. Metcalf, A. Mathur, and K. A. Hassett, (2010), Distributional Impacts of Comprehensive Climate Policy Package’, NBER Working Paper, Nr. 16101. 264. 2011 JCT Report, citing Congressional Budget and Impoundment Control Act of 1974 (Pub. L. No. 93- 344), sec. 3(3). 265. V. Fleischer, (2014), Curb Your Enthusiasm for Pigouvian Taxes, (draft March 2014), ssrn.com, p. 16. 266. L. L. Batchelder, F. T. Goldberg, Jr., and P. R. Orszag, (2006), Efficiency and Tax Incentives: The Case for Refundable Tax Credits, Stanford Law Review, Vol. 59, Issue 23, pp. 1– 54. They argue ‘Unless there is reason to think that the subsidy is better targeted to particular income groups and not others, they argue, tax deductions, exemptions, and non- refundable credits are suboptimal’. Fleischer poses a question about how often uniformity is optimal (p. 16). His point of view is that ‘Variation in the marginal social benefit suggests that Pigovian subsidies are often better targeted to some groups and not others’. 267. D. A. Weisbach and J. Nussim, (2004), The Integration of Tax and Spending Programs, Yale Law Journal, Vol. 113, pp. 955– 1028. 268. V. Fleischer, (2014), Curb Your Enthusiasm for Pigouvian Taxes, (draft March 2014), ssrn.com, p. 17. 269. ‘Tax expenditures distort the budget process, favor well- connected industries with powerful lobbyists, and are not well understood by the median voter. Perhaps for these reasons, they are immensely popular in Congress. Tax expenditures have nearly doubled in number and size (adjusted for inflation) over the last thirty years, and there appears to be little political appetite for turning the tide. (Fleischer, p. 18). 270. B. Galle, (2012), The Tragedy of the Carrots: Economics and Politics in the Choice of Price Instruments, 64 Stanford Law Review, Vol. 797, pp. 813– 840; See B. Galle, (2014), Tax, Command, or Nudge? Evaluating the New Regulation, Texas Law Review, Vol. 92, pp. 837– 894, arguing that nudges are preferable to price instruments under many circumstances. Notes 433

271. See in detail on the ‘big data’ aspect, including the challenges and non- neutrality: T. F. Dapp and V. Heine (L. Slomka ed.), (2014), Big Data, The Untamed Force, Deutsche Bank Research. 272. A. Bruvoll, (2013), The Misinterpretation of Pigouvian Taxes, Journal of Environmental Protection, Vol. 4, pp. 154– 160. 273. See infra/supra. 274. See also V. Fleischer, (2014), Curb Your Enthusiasm for Pigouvian Taxes, (draft March 2014), ssrn.com, pp. 18– 19. 275. For example, take the case where a unit of carbon production causes a unit of carbon emission, and let us further assume that a unit of carbon emission causes a unit of external harm in the form of harmful global warming. A uniform tax on carbon production increases the marginal cost of carbon production to the optimal level with little deadweight loss; G. E. Metcalf and D. Weisbach, (2009), The Design of a Carbon Tax, Harvard Environmental Law Review, Vol. 33, p. 499. 276. See supra, D. A. Weisbach and J. Nussim, (2004), The Integration of Tax and Spending Programs, Yale Law Journal, Vol. 113, pp. 955– 1028. 277. The most recent proposal, in Congressman Dave Camp’s tax reform legislation, focuses on systemic risk rather than excessive volatility. The bill would impose a 35 basis point (0.035%) tax on assets above $500 billion owned by certain systemically important financial institutions (SIFIs). Only a handful of institutions would be affected, mostly large investment banks and insurance companies. The excise tax would apply to calendar quarters beginning after 2014 and be due on the first day of the third month beginning after the close of each calendar quarter. The $500 billion threshold would be indexed for increases in GDP after calendar year 2015. According to a JCT technical explanation, the indexing for 2016 would be calculated by multiplying by the ratio of the latest estimate of GDP for 2014 over the latest estimate of GDP for 2013 (Technical explanation of the Tax Reform Act 2014 – A discussion draft of the Chairman of the House Committee on ways and means to reform the Internal Revenue Code. Title eight: Excise taxes. February 26, 2014, JCX- 18- 14, pp. 8– 16). 278. A. L. Nichols, (1984), Targeting Economic Incentives for Environmental Protection, p. 31. 279. Supra, Ibid. p. 77 and 83. 280. S. Rose- Ackerman, (1973), Effluent Charges: A Critique, Canadian Journal of Economy, Vol. 512, pp. 520– 521: ‘if marginal damages vary across sites, a simple uniform effluent charge will not be optimal and that it is only a sophisticated effluent charge which is certain to be more efficient than a primitive nonmar- ket mode of allocation’. See A. L. Nichols, (1984), Targeting Economic Incentives for Environmental Protection. for a study on benzene. He further points out that ‘The problem becomes even greater when a firm or individual can substitute an untaxed activity, as the substitution by a firm that causes no (or little) harm creates deadweight loss’. This forces the question about the preference for a direct tax on the harm or an indirect tax on the activity and the difference in terms of impact. 281. L. Kaplow and S. Shavell, (2002), On the Superiority of Corrective Taxes to Quantity Regulation, American Law and Economics Review, Vol. 4, p. 4. 282. The problem is that for many activities, the variables that cause external harms vary, and the tax instrument cannot be as finely adjusted as necessary to reach the optimal amount; Ibid. p. 12. 283. Further examples that he provides: ’Taxes would often be inaccurate, unequal to the expected harm. The tax on crane operations would often be inaccurate if 434 Notes

it were not based on the loads that a crane lifts and the exposure of victims to risk; the tax on driving would often be biased if it did not reflect the care and skill of drivers and the types of roads on which driving is done; the tax on snow and ice left on sidewalks would often be erroneous if it did not depend on the slipperiness of the snow, how long it takes to melt, and the amount of foot traffic on the sidewalks. Hence, the tax would sometimes be too high, such as when a crane lifts lighter than average loads and few individuals are exposed to risk at a construction site, when ice and snow quickly melts and there is little foot traffic on the sidewalks, or when drivers are careful and drive new cars mainly on well- designed, limited access roads. And sometimes the tax would be too low, such as when an older crane lifts heavy loads and many individuals are exposed to risk, or when ice and snow will remain for a long period where foot traffic is high, and so forth’. 284. S. Shavell, (2011), Corrective Taxes Versus Liability, American Economic Review, Vol. 101, Issue 3, pp. 273– 276. Shavell can be credited for making explicit the trade- off between a Pigovian (i.e. corrective) tax versus a liability in contrast to the much earlier and much more voluminous debated regulation versus corrective taxation trade- off. See Ibid. Bovenberg and Goulder, supra and infra). 285. V. Fleischer, (2014), Curb Your Enthusiasm for Pigouvian Taxes, (draft March 2014), ssrn.com, footnote 220. 286. Ibid. p. 22. 287. U. Gneezy and A. Rustichini, (2000), Fine is a Price, Journal of Legal Studies, Vol. 29, p. 1. 288. See: A. B. Atkinson and J. E. Stiglitz, (1976), The Design of Tax Structure: Direct Versus Indirect Taxation, Journal of Public Economics, Vol. 6.1, pp. 55– 75. B. C. Greenwald and J. E. Stiglitz, (1986), Externalities in Economies with Imperfect Information and Incomplete Markets, The Quarterly Journal of Economics, Vol. 101, Issue 2, pp. 229– 264; J. Slemrod, (1990), Optimal Taxation and Optimal Tax Systems, Journal of Economic Perspectives, Vol. 4, Issue 1, pp. 157– 178. 289. H. Latin, (1985), Ideal Versus Real Regulatory Efficiency: Implementation of Uniform Standards and Fine- Tuning Regulatory Reforms, Stanford Law Review, pp. 1267– 1332; C. A. Jones and S. Scotchmer, (1990), The Social Cost of Uniform Regulatory Standards in a Hierarchical Government, Journal of Environmental Economics and Management, Vol. 19, Issue 1, pp. 61– 72. 290. L. Kaplow, (2006), Optimal Control of Externalities in the Presence of Income Taxation, NBER Working Paper Nr. 12339. See also: A. L. Bovenberg and L. H. Goulder, (2002), Environmental Taxation and Regulation, in A. J. Auerbach and M. Feldstein (eds.), Handbook of Public Economics, 1st Ed., Vol. 3, Chapter 23, pp. 1471– 1545 (Elsevier). 291. V. Fleischer, (2014), Curb Your Enthusiasm for Pigouvian Taxes, (draft March 2014), ssrn.com, pp. 24– 25. See also: M. Z. Jacobson, (2010), Enhancement of

Local Air Pollution by Urban CO2 Domes, Environmental Science and Technology, Vol. 44, p. 2497. He indicates: ‘Air pollution regulations worldwide assume

arbitrarily that such [CO2 domes over cities] have no local health impact, and carbon policy proposals, such as “cap and trade”, implicitly assume that CO2 impacts are the same regardless of where emissions occur’. 292. W. J. Baumol, (1972), On Taxation and the Control of Externalities, American Economic Review, Vol. 3, pp. 53– 78. 293. Fleischer takes the example of tractors on roads: ‘There is also presumably variation among the marginal social benefit of private individuals; we care more Notes 435

about the ER doctor trying to get to work on time than the college student driving to meet friends at a bar. When congestion impairs private benefit (like the college student), policymakers can rely on price discrimination to sort drivers, as we see with express toll lanes on bridges and highways. But where the benefit is social, policymakers may need to carve out exemptions from the congestion charge, as is often done for taxis, delivery trucks, certain public servants, and so on’, p. 26. 294. Fleischer uses the example of gun possession (p. 27). 295. See for example N. Staudt and T. Griffith, (2014), Guns and Taxes, Tax Policy Seminar Duke Law School Working Paper, January 30, 2014. 296. Fleischer comments on gun possession (p. 28) ‘Guns are hard to trace once they enter the population, and reducing the production of guns would have a beneficial effect. If one identifies the social harm from guns as the risk that the gun will slip into the wrong hands – rather than the risk that the gun will be used as intended – the distribution of marginal social cost may be more narrow’. 297. See extensively V. Fleischer, (2014), Curb Your Enthusiasm for Pigouvian Taxes, (draft March 2014), ssrn.com, pp. 29– 33. 298. See also R. Vinelli, (2009), Sugar Taxes Aren’t Sweet: The Case Against Taxes on Sugar- Based Drinks, B. N. Cardozo School of Law Working Paper. Vinelli demonstrates that a Pigovian tax on sugary drinks would be ineffective at combating obesity for four reasons: (1) it would be under-inclusive; (2) the tax would be too small to adequately deter consumers; (3) tax revenues will decline while the associated health costs will rise; and (4) this tax would be highly regressive. 299. A fat chance, The Economist, November 17, 2012. 300. S.C. Savv, M Tornaritis, M E Savva, Y Kourides, A Panagi, N Silikiotou, C Georgiou and A Kafatos, (2000), Waist Circumference and Waist- to- Height Ratio are Better Predictors of Cardiovascular Disease Risk Factors in Children than Body Mass Index, International Journal of Obesity & Related Metabolic Disorders, Vol. 24, p. 11. 301. See V. Fleischer, (2014), Curb Your Enthusiasm for Pigouvian Taxes, (draft March 2014), ssrn.com, p. 31, footnotes 131– 133 for literature references. 302. Or maybe not, see recently: R. D. Semba, Luigi Ferrucci, Benedetta Bartali; Mireia Urpí- Sarda, Raul Zamora- Ros; Kai Sun, Antonio Cherubini, Stefania Bandinelli, Cristina Andres- Lacueva, (2014), Resveratrol Levels and All- Cause Mortality in Older Community- Dwelling Adults, JAMA Intern Medicine, Vol. 174, Issue 7, pp. 1077– 1084. The study casts significant doubt on the health benefits of resveratrol, an anti- oxidant which can be found in red wine and chocolate. 303. I. Parry, (2003), On the Costs of Excise Taxes and Income Taxes in the UK, International Tax and Public Finance, Vol. 10, pp. 281– 304. 304. For a long time, the rational behavior of humans was assumed, conflicting with an excise guarding the individual interest of the consumer; see G. Becker and K. Murphy, (1988), A Theory of Rational Addiction, Journal of Political Economy, Vol. 96, pp. 675– 700 (individuals recognize the full price of addictive consumption goods: both the current monetary price, and the cost in terms of future addiction). They assume among other things that individuals can not only optimize their utility function, but that they can then carry out those optimal plans. In more recent times, it has become clear that individuals, over longer periods of time, are by far not consistently rational in their decisions; see in detail J. Gruber, (2010), Commentary by J. Gruber on I. Crawford, M. Keen and S. Smith, (2010), Value Added Taxes and Excises, in J. Mirrlees, S. Adam, 436 Notes

T. Besley, R. Blundell, S. Bond, R. Chote, M. Gammie, P. Johnson, G. Myles, and J. Poterba (eds.), Dimensions of Tax Design, Oxford University Press, Oxford, pp. 407– 422, in particular 2. Problems with the Standard Model, pp. 410– 414. 305. Regarding the externalities of tobacco and alcohol use see: Ibid. pp. 321– 327. 306. These problems usually involve a lack of clear identification of costs and benefits, asymmetric information about tastes and available technology, lack of precise measures of supply and demand, and different regional impacts. See further: T. A. Barthold, (1994), Issues in the Design of Environmental Excise Taxes, Journal of Economic Perspectives, Vol. 8, Issue 1, pp. 133– 151, in particular pp. 136– 141. 307. C. R. Knittel and R. Sandler, (2013), The Welfare Impact of Indirect Pigouvian Taxes: Evidence from Transportation, NBER Working Paper Nr. 18849. They show that vehicle emissions are positively correlated with vehicle elasticities for miles traveled with respect to fuel prices (in absolute value) – i.e. dirtier vehicles respond more to fuel prices. This correlation substantially increases the optimal second- best uniform gasoline tax. Second, and perhaps more importantly, they show that a uniform tax performs very poorly in eliminating deadweight loss associated with vehicle emissions (in contrast to Batchelder, supra and infra); in many years in their sample over 75% of the deadweight loss remains under the optimal second- best gasoline tax. Substantial improvements to market efficiency require differentiating based on vehicle type, for example vintage. There is a more positive overall result: because of the positive correlation between emissions and elasticities, the health benefits from a given gasoline tax increase by roughly 90% compared with what one would expect if emissions and elasticities were uncorrelated. 308. V. Fleischer, (2014), Curb Your Enthusiasm for Pigouvian Taxes, (draft March 2014), ssrn.com, p. 33. 309. And the social harm of the unproductive build- up and accumulation of capital and wealth in general. 310. See about the mis- estimations of the net wealth of Western nations: G. Zuckman, (2013), The Missing Wealth of Nations: Are Europe and the US Net Debtors or Net Creditors?, The Quarterly Journal of Economics, Vol. 128, Issue 3, pp. 1321– 1364. 311. A large chunk of wealth creation is due to market- based asset revaluation. 312. Datasource: Eurostat 2011 including taxes on business income and wealth. 313. Although he realizes that is an illusion which will never happen. See T. Piketty (2014), Capital in the 21st Century, Harvard University Press, Cambridge MA Title 4, Chapters 14 and 15. He refers to the high progressive tax rates some European countries implemented in the 1970s. 314. M. Wolf, (2014), Wipe Out Rentiers With Cheap Money, Financial Times, (May 7). 315. Datasource: OECD, World Bank Development Indicators, Haver Analytics. 316. Datasource: Bureau of Economic Analysis, via Haver Analytics, National Bureau of Economic Research. 317. If tax laws are not just a set of rules to finance the government’s activities, but are overarched by principles such as fairness and are morally coded, whereby we can observe society as an organic living body where one part takes care of the other (via taxes) as part of the social contract, and to avoid the living organ- ism from stopping functioning properly a multi- dimensional approach towards contributions is required. A very good, albeit anecdotal, viewpoint can be found Notes 437

in E. Warren, (2014), A Fighting Chance, Metropolitan, New York who indicates: ’There is nobody in this country (US ed.) who got rich on his own. Nobody. You built a factory out there? Good for you. But I want to be clear: You moved the goods to market on roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory…. Now look, you built the factory and it turned into something terrific, or great idea? God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid that comes along’. 318. See in detail: G. Standing, (2011), The Precariat: The New Dangerous Class, Bloomsbury Academic, London/New York. 319. Underlying most economic models there are three axioms: (1) individualism, (2) rationality, and (3) efficiency. It causes most economic models not to correspond with reality as is. Viewing the world through an economic lens, assuming it is the only ‘code’ that can provide normative directions, does not only unnec- essarily limit our understanding of the world, it includes the permanent danger that normative economics will dictate policies geared towards adjusting the real world to certain economic models or worse utopian aspirations (‘the economic code structures the world we live in’). See in detail: R. Lanneau, (2010), Les fondements épistémologiques de l’analyse économique du droit, LGDJ, collection Fondation Varenne, Paris, pp. 16– 34, passim. Regarding the assumptions made in economic models it can be said that ‘the point has often been made that assumptions, and even problems themselves, are chosen more for their mathematical convenience/tractability than for their economic relevance’ making the logic of the economic code more important than the reality it tries to catch; see V. Chick, (1998), On Knowing One’s Place, The Role of Formalism in Economics, Economic Journal, Vol. 108, Issue 451, pp. 1859– 1869, in particular p. 1865. Given the degree of liberty present in constructing economic models, they cannot be falsified, an essential feature of any given useful scientific theory. ‘If a theory cannot be falsified, neither it nor its predictions can be validated, for everything that happens is by definition consistent with the theory’; see R. Posner, (1998), Rational Choice, Behavioral Economics, and the Law, Stanford Law Review, Vol. 50, pp. 1551– 1575 in particular p. 1560. Empirical testing of economic models is useful, but only on a different level. Empirical testing often resembles illustrations of the theory rather than a verification; see F. Machlup, (1955), The Problem of Verification in Economics, Southern Journal of Economics, Vol. 22, pp 1– 21, in particular p. 19. The validity of economic models depends on the belief about the validity. The relevance of economic models is therefore asserted as it describes a world that does not (yet) exist. Even if the economic model would be falsified in the light of new evidence, the underlying theory is safeguarded; see V. Smith, (1994), Economics in the Laboratory, Journal of Economic Perspectives, Vol. 8, pp 113– 131. A theory that can/will be restored in the light of new evidence reflects the fact that the theory is more an assumption than something to be tested, supposed to be true even before being tested. 320. E. P. Lazear, (2000), Economic Imperialism, Quarterly Journal of Economics, Vol. 115, Issue 1, pp. 99– 146. 321. Report of the LSE Expert Group on the Economics of Drug Policy, (2014), Ending the Drugs Wars, LSE working Paper. 438 Notes

322. See Berwin, Leighton and Paisner, (2013), The Speed of Business, and more in general for the financial industry: A. O. Santos and D. Elliott, (2012), Estimating The Costs of Financial Regulation, IMF Staff Discussion Note, SDN/12/11. 323. In many European member states there seems sufficient room for a tax shift for distortionary labor taxes to other tax instruments which are more growth- friendly; see: EC, (2014), Tax Reforms in EU Member States: 2014 Report, EC Taxation Papers Series, Working Paper Nr. 48, pp. 51– 58. 324. A parallel can be drawn here with the ‘Death- of- God Atheism’ caused by the inability of theology as a science to provide all the answers with respect to a Deity (scientific theology). Post- modernism allows for a revival of spirituality and religion after letting go of those modernistic dreams of analyzing God in a scientific (and holistic) way and the understanding that scientific knowledge has its clearly identifiable limits; see J. D. Caputo, (2001), On Religion, Routledge, London, pp. 60– 63. 325. H. A. Arkes, C.A. Joyner, M.V. Pezzo, J.G. Nash, K. Siegel- Jacobs, and E. Stone (1994), The Psychology of Windfall Gains, Organizational Behavior and Human Decision Processes, Vol. 59, Issue 3, pp. 331– 347. 326. V. Fleischer, (2014), Curb Your Enthusiasm for Pigouvian Taxes, (draft March 2014), ssrn.com, p. 34. 327. Maybe it impacted the size or location or some characteristics of the property ultimately bought. 328. V. Fleischer, (2014), Curb Your Enthusiasm for Pigouvian Taxes, (draft March 2014), ssrn.com, p. 34 and D. J. Ventry, (2010), The Accidental Deduction: A History and Critique of the Tax Subsidy for Mortgage Interest, Law & Contemporary Problems, Vol. 73, p. 233. 329. V. Fleischer, (2014), Curb Your Enthusiasm for Pigouvian Taxes, (draft March 2014), ssrn.com, p. 35 and Ventry Ibid. 330. L. L. Batchelder, F. T. Goldberg, Jr., and P. R. Orszag, (2006), Efficiency and Tax Incentives: The Case for Refundable Tax Credits, Stanford Law Review, Vol. 59, Issue 23, pp. 45– 50. Fleischer reframes their position: ‘The distribution of marginal social benefit may not vary across different income groups, and if that is the case, the optimal tax design is a uniform refundable credit. But in situations where distribution of marginal social cost varies according to other characteristics, such as industry, education, age, family size, immigration status, or countless other demographic characteristics, uniformity may not be optimal’ (p. 35). 331. T. N. Tideman and F. Plassmann, (2010), Pricing Externalities, European Journal of Political Economy, Vol. 26, pp. 176– 184. 332. That in itself is not new: D. L. Kelly and C. D. Kolstad, (1999), Bayesian Learning, Growth, and Pollution, Journal of Economic Dynamics and Control, Vol. 23, pp. 491– 518; C. D. Kolstad, (1996), Learning and Stock Effects in Environmental Regulation: The Case of Greenhouse Gas Emissions, Journal of Environmental Economics and Management, Vol. 31, pp. 1– 18; A. J Leach, (2007), The Climate Change Learning Curve, Journal of Economic Dynamics and Control, Vol. 31, pp. 1728– 1752; L. Karp and J. Zhang, (2006), Regulation with Anticipated Learning about Environmental Damages, Journal of Environmental Economics and Management, Vol. 51, pp. 259– 279. 333. T. N. Tideman and F. Plassmann, (2010), Pricing Externalities, European Journal of Political Economy, Vol. 26, p. 177. 334. This was evidenced before: E. Dohlman, L. Hoffman, R. Schnepf, and M. Ash, (2000), An Assessment of a Futures Method Model for Forecasting Notes 439

the Season- average Farm Price for Soybeans, United States Department of Agriculture, Economics Research Service, Oil Crops Situation and Outlook Yearbook, pp. 16– 21 (October); J. D. Hamilton, (2009), Daily Changes in Fed Funds Futures Prices, Journal of Money, Credit, and Banking, Vol. 41, pp. 567– 582. 335. T. N. Tideman and F. Plassmann, (2010), Pricing Externalities, European Journal of Political Economy, Vol. 26, p. 177. 336. Ibid. p. 177. 337. Others have done so : D. L. Kelly and C. D. Kolstad, (1999), Bayesian Learning, Growth, and Pollution, Journal of Economic Dynamics and Control, Vol. 23, pp. 491– 518; A. J. Leach, (2007), The Climate Change Learning Curve, Journal of Economic Dynamics and Control, Vol. 31, pp. 1728– 1752. 338. T. N. Tideman and F. Plassmann, (2010), Pricing Externalities, European Journal of Political Economy, Vol. 26, p. 178. 339. Ibid. p. 184. 340. See in detail on the strategic decisions regarding green taxes in the EU and the legal implications of those choices: P. Mastellone, (2014), The Emergence and Enforcement of Green Taxes in the European Union, Part I & II, European Taxation (November/December 2014), IBFD, Amsterdam, pp. 478– 490, 545– 563. European member states have so far maintained to a large degree their sovereignty in this matter, although the tide is gradually shifting. 341. EU Emissions Trading System: Failing at the Third Attempt, Corporate Europe Observatory/Carbon Trade Watch, April 2011. See for a comparison between emission trading systems and environmental taxes: D. Fullerton, A. Leicester, and S. Smith, (2010), Environmental Taxes Versus Emissions Trading (5.2.4), in J. Mirrlees, S. Adam, T. Besley, R. Blundell, S. Bond, R. Chote, M. Gammie, P. Johnson, G. Myles, and J. Poterba (eds.), Dimensions of Tax Design, Oxford University Press, Oxford, pp. 436– 439. 342. S. Mufson, (2009), Europe’s Problems Color U.S. Plans to Curb Carbon Gases, The Washington Post, April 9, 2007. 343. The (European Trading System) ETS has long been in jeopardy. It is a cap- and- trade scheme in which permits exist to emit about 16 billion tonnes’ worth carbon in 2013– 2020, or roughly half the European Union’s total carbon emissions, are allocated to firms and can then be traded between them. Partly because recession has reduced industrial demand for the permits, and partly because the EU gave away too many allowances in the first place, there is massive over- capacity in the carbon market. The European Commission, the EU’s executive arm, hatched a plan to take 900 million tonnes of carbon allowances off the market now and reintroduce them later, when – it was hoped – demand would be stronger (the proposal is referred to as ‘backloading’). ‘Over the past few years more than a dozen countries and regions have followed the EU in establishing or proposing cap- and- trade schemes. They include Australia, South Korea, California, and several Chinese provinces’. (ETS, RIP? The failure to reform Europe’s carbon market will reverberate around the world, The Economist, 2013, 20th April) 344. R. H. Coase, (1960), The Problem of Social Cost, Journal of Law and Economics, Vol. 3, Issue 1, pp. 1– 44. 345. A. H. Barnett and B. Yandle, (2009), The End of the Externality Revolution, Social Philosophy and Policy, Vol. 26, Issue 2, pp. 130– 150. 346. See for example R. Vinelli, (2009), Sugar Taxes Aren’t Sweet: The Case against Taxes on Sugar- Based Drinks, B. N. Cardozo School of Law Working Paper, who 440 Notes

refers to the alternative model for a soda tax to tax the producers of sugar, remove corn subsidies, etc. see pp. 20– 22. 347. D. Fullerton and G. Metcalf, (1998), Environmental Taxes and the Double- Dividend Hypothesis: Did You Really Expect Something for Nothing?, Chicago- Kent Law Review, Vol.73, pp. 221– 256. 348. R. Coase, (1960), The Problem of Social Cost, Journal of Law and Economics, Vol. 3, Issue 1, pp. 1– 44. See for extensive argumentation supra. 349. E. A. Thompson and R. Batchelder, (1972), On Taxation and the Control of Externalities: Comment, The American Economic Review, Vol. 64, Issue 3, pp. 462– 466. 350. W. J. Baumol, (1974), On Taxation and the Control of Externalities: Reply, The American Economic Review, Vol. 64, Issue 3, p. 472. 351. J. M. Buchanan, (1969), External Diseconomies, Corrective Taxes, and Market Structure, American Economic Review, Vol. 59, pp. 174– 177; A. H. Barnett, (1980), The Pigouvian Tax Rule under Monopoly, American Economic Review, Vol. 70, pp. 1037– 1041. 352. See: Y. Katsoulacos and A. Xepapadeas, (1995), Environmental Policy under Oligopoly with Endogenous Market Structure, Scandinavian Journal of Economics, Vol. 97, pp. 411– 420; N. V. Long and A. Soubeyran, (1999), Pollution, Pigouvian Taxes, and Asymmetric International Oligopoly, CIRANO Working Paper, Montréal; R. Morgenstern, (1995), Environmental Taxes: Dead or Alive? Resources for the Future, Working Paper 96- 03; S. Smith, (1992), Taxation and the Environment: A Survey, Mimeo, Centre for Social and Economic Research on the Global Environment (CSERGE), University of East Anglia. 353. See in detail about the trade- off in the environmental sphere: J. M. Buchanan and G. Tullock, (1975), Pollutor’s Profits and Political Response: Direct Controls Versus Taxes, The American Economic Review, Vol. 65, Issue 1, pp. 139– 147. 354. J. V. Nye, (2008), The Pigou Problem, Regulation, Vol. 31, Issue 2, pp. 32– 37. 355. B. Weisbrod, (1962), External Benefits of Public Education, Princeton University Press, Princeton. 356. R. H. Frank, (2003), Positional Externalities Cause Large and Preventable Welfare Losses, Cornell Working Paper, R. H. Frank, (2003), Are Positional Externalities Different from Other Externalities?, Cornell Working Paper. 357. F. Hirsch, (1976), Social Limits to Growth, Harvard University Press, Cambridge, MA and R. H. Frank, (1991), Positional Externalities, in Richard Zeckhauser (ed.), Strategy and Choice: Essays in Honor of Thomas C. Schelling, MIT Press, Cambridge, MA, pp. 25– 47. 358. A. Marshall, (1947), Principles of Economics, [1890], Macmillan, London. 359. W. Baumol and W. E. Oates, (1975), The Theory of Environmental Policy, Prentice Hall, Englewood Cliffs, NJ; W. Baumol and W. E. Oates, (1975), The Instruments for Environmental Policies, in E. S. Mills (ed.), Economic Analysis of Environmental Problems, NBER, Cambridge MA, pp. 95– 154. 360. J. Buchanan, (1969), Cost and Choice, Markham Press, Chicago. 361. L. Lachmann, (1969), Methodological Individualism and the Market Economy, in E. Streissler, G. Haberler, F. A. Lutz, and F. Machlup (eds.), Roads to Freedom: Essays in Honor of Friedrich A. Hayek, Routledge and Paul Kegan, London. 362. F. Hayek, (1948), Social Calculation I and II, The State of the Debate/The Competitive Solution in Individualism and Economic Order, South Bend Indiana: gateway Editions Ltd., pp. 77 and 110, Reprinted from Collectivist Economic Planning, George Rutledge and Sons Ltd., London; F. Hayek, (1948), The Use of Knowledge in Society, in The Competitive Solution in Individualim Notes 441

and Economic Order (see supra in this note), Reprinted from The American Economic Review, Vol. 35, Issue 4, [1945], pp. 519– 530 363. A. V. Kneese, (1977), Economics and the Environment, Penguin Books, New York, p. 57. 364. G. P. O’Driscoll and M. J. Rizzo, (1985), The Economics of Time and Ignorance, Basil Blackwell, Oxford, pp. 140– 141. 365. L. von Mises, (1981), Socialism, Liberty Classics [1922], Indianapolis. 366. L. von Mises, (1966), Human Action [1949], Contemporary Books Inc., Chicago, pp. 656– 658. Also G. P. O’Driscoll and M. J. Rizzo, (1985), The Economics of Time and Ignorance, Basil Blackwell, Oxford, p. 142, who see property rights solved in courts who can account for ongoing resource allocation decisions. 367. L. von Mises, (2005), Liberalism [1927], Liberty Fund, Indianapolis, pp. 52– 59, Sheed, Andrew and McMeel, Kansas City; L. von Mises, (1966), Human Action [1949], Contemporary Books Inc., Chicago, p. 655; M. Rothbard, (1962), Man, Economy and State, Nash, Los Angeles, Chapter 12. 368. See more recently: B. P. Simpson, (2003), Why Externalities are not a Case of Market Failure, Working paper, also in detail: B. Simpson, (2006), Markets Don’t Fail, The Mises Review, Vol. 12, Issue 3 and B. Simpson, (2005), Markets Don’t Fail, Lexington Books (Rowman and Littlefield), Lanham, MD. Simpson’s views are largely in line (but more pronounced and updated) with those of Kirzner, see: I. M. Kirzner, (1963), Market Theory and the Price System, D. van Nostrand Company Inc, Princeton, NY, pp. 33– 45, 105– 142, 201– 265 and 297– 311. 369. Rothbard has always been a strict advocate of a Lockean natural rights approach to private property. This implies a concept of voluntarism that is inextricably tied to the use of one’s own body and ‘justly acquired’ property. See further: M. Rothbard, (1973), For a New Liberty, Macmillan, New York and M. Rothbard, (1982), The Ethics of Liberty, Humanities Press, Atlantic Highlands, NJ. 370. M. Rothbard, (1982), Law, Property Rights and Air Pollution, The Cato Journal, Vol. 2, Issue 1, p. 60. 371. I. Kirzner, (1963), Market Theory and the Price System, D. von Nostrand Co. Inc., Princeton, NJ, pp. 298– 299. Also in I. Kirzner, (1973), Competition and Entrepreneurship, University of Chicago Press, Chicago, pp. 218– 222 where he claims: ‘The state of equilibrium is the state in which all actions are perfectly coordinated, each market participant dovetailing his decisions with those which he (with complete accuracy) anticipates other participants will make. The perfection of knowledge which defines the state of equilibrium ensures complete coordination of individual plans’ (p. 218). 372. See in detail: R. Cordato, (2007), Efficiency and Externalities in an Open- Ended Universe, The Ludwig von Mises Institute, Auburn, AL, p. x. Originally published by Kluwer Academic Publishers in 1992, pp. 18– 27. Hayek also rejects the notions of classical welfare theory. His analysis of collective goods focuses primarily on the divergence between costs incurred and benefits received than the conflicts in property usage. See also for the work of the early neoliberals (Menger, Böhm- Bawerk, von Wieser) on this matter pp. 27– 35. 373. See for Rothbard’s normative foundation (‘demonstrated preference’): M. Rothbard, (1977), A Reconstruction of Utility and Welfare Economics, Center for Libertarian Studies, New York, published in M. Sennholz (ed), (1956), Freedom and Free Enterprise, Van Nostrand, Princeton, NJ. 374. R. Cordato, (2007), Efficiency and Externalities in an Open- Ended Universe, The Ludwig von Mises Institute, Auburn, AL, p. x. Originally published by Kluwer Academic Publishers in 1992. 442 Notes

375. F. A. Hayek, (1976), Law, Legislation and Liberty, Vol. 2, University of Chicago Press, Chicago, p. 108. See others in: L. von Mises, (1966), Human Action [1949], Contemporary Books Inc., Chicago, pp. 232– 234 and J. Buchanan, (1979), What Should Economists Do?, in What Should Economists Do?, Liberty Press, Indianapolis. 376. F. A. Hayek, (1976), Law, Legislation and Liberty, Vol. 2, University of Chicago Press, Chicago, p. 113. 377. R. Posner, (1973), Economic Analysis of Law, Little Brown and Co., p. 94. 378. F. A. Hayek, (1945), Social Calculation I and II, The State of the Debate/The Competitive Solution in Individualism and Economic Order, gateway Editions Ltd, South Bend Indiana, Ibid. pp. 77– 78 and I. Kirzner, (1963), Market Theory and the Price System, D. von Nostrand Co. Inc., Princeton, NJ, p. 35. 379. See R. Cordato, (2007), Efficiency and Externalities in an Open- Ended Universe, The Ludwig von Mises Institute, Auburn, AL, Chapters 3 and 4. 380. The term itself had been used before by, among others, Hayek, but Cordato substantiates the catallactic efficiency further. 381. F. A. Hayek, (1976), Law, Legislation and Liberty, Vol. 2, University of Chicago Press, Chicago, p. 114. 382. I. Kirzner, (1963), Market Theory and the Price System, D. von Nostrand Co. Inc., Princeton, NJ, p. 13– 14. 383. T. L. Anderson and D. R. Leal, (1991), Free Market Environmentalism, Pacific Research Institute for Public Policy, San Francisco. 384. A. Bowman, J. Froud, S. Johal, J. Law, A. Leaver, and K. Williams, (2012), Bringing Home the Bacon: From Traders’ Mentality to Industrial Policy, Working Paper, Centre for Research on Socio- Cultural Change. 385. Regarding the unholy dynamics of extreme shareholderism see: M. Wolf, (2014), AstraZeneca is More than Investors’ Call, Financial Times (May 9). 386. K. Armstrong, (2009), De kwestie God. De toekomst van religie, De Bezige Bij, Homo Religiosus, Amsterdam, pp. 25– 55. 387. See for a quantitative analysis of such a tax shift in the EU: EC, (2014), Tax Reforms in EU Member States, EC Taxation Papers Series, Working Paper Nr. 48, pp. 60– 62. 388. H. Vetter, (2013), Environmental Taxes in the Long Run, Economics Discussion Papers, Nr 2013- 29, Kiel Institute for the World Economy. See also: W. J. Baumol, (1979), Quasi Optimality: The Price We Must Pay for a Price System, The Journal of Political Economy, Vol. 87, pp. 578– 599. 389. L. Kaplow and S. Shavell, (2002), On the Superiority of Corrective Taxes to Quantity Regulation, American Law and Economics Review, Vol. 4, pp. 7– 11. 390. The road from optimal tax theory to applied tax policy design is long and full of distractions; see: B. Jacobs, (2013), From Optimal Tax Theory to Applied Tax Policy, CESifo Working Paper Series Nr. 4151. 391. M. Gilens and B. I. Page, (2014), Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens, Perspectives on Politics, Vol. 12, Issue 3, pp. 564– 581. They statistically demonstrate that reality provides evidence of substantial support for theories of economic elite domination and for theories of biased pluralism, but not for theories of majoritarian electoral democracy or majoritarian pluralism. See also M. Gilens, (2014), Affluence and Influence: Economic Inequality and Political Power in America, Princeton University Press, Princeton, NJ, pp. 352. 392. R. Bregman, (2014), Het waarmaken van idealen begint bij de belastingen die we betalen, De Correspondent, who refers to the beard tax introduced by Peter Notes 443

the Great in 1698 as a first type or predecessor of a Pigovian tax, although there necessarily was not an externality in this case, but merely a drive for moderniza- tion of society. 393. B. S. Frey and R. Eichenberger, (1994), To Harmonize or to Compete? That’s not the Question, Journal of Public Economics, Vol. 60, pp. 335– 349; C. Webber en A. Wildavsky, (1986), A History of Taxation and Expenditure in the Western World, Simon and Schuster, New York, pp. 154– 167, passim. A full harmonization of income taxes is very unlikely given the very different policy objectives of the different member states and the way they finance their welfare states (social contributions and/or general tax revenues in various proportions) and the underlying philosophies; See C. E. McLure, Jr., (2004), Corporate Tax Harmonization in the European Union: The Commission’s Proposals, Tax Notes International (November 20, 2004), pp. 775– 801. See also in a broader context: S. Cnossen, (2013), Meer fiscale diversiteit in de Europese Unie, Rijkers Bundel, Prisma Print, Tilburg University, pp. 27– 46, who argues in favor of more fiscal diversity in the European tax landscape, arguing that the scarcity of public funding (in a situation of tax rivalry among member states) will lead to better and more efficient allocation of public resources. 394. Ph. Legrain, (2014), European Spring: Why Our Economies and Politics are in a Mess, and How to Put Them Right, CB Creative Books, London. 395. E. E. Schattschneider, (1975), The Semi- Sovereign People: A Realist’s View of Democracy in America, Dryden Press, [1960], Oak Brook, IL. 396. See supra Chapter 2. See also: A. K. Henrikson, (2013), Sovereignty, Diplomacy and Democracy: The Changing Character of ‘International’ Representation, From State to Self, The Fletcher Forum of World Affairs, Vol. 37, Issue 3, special ed., pp. 111– 140. 397. L. V. Faulhaber, (2010), Sovereignty, Integration, and Tax Avoidance in the European Union: Striking the Proper Balance, Colombia Journal of Transnational Law, Vol. 48, Issue 2, pp. 117– 241. 398. W. Kerber, (1999), Interjurisdictional Competition within the European Union, Fordham International Law Journal, Vol. 23, Issue 6, pp. 217– 249. 399. Goodheart’s Law can be described as ‘As soon as the government attempts to regulate any particular set of financial assets, these become unreliable as indicators of economic trends’. This is because investors try to anticipate what the effect of the regulation will be, and invest so as to benefit from it. C. A. E. Goodhart, (1975), Problems of Monetary Management: The U.K. Experience, Papers in Monetary Economics (Reserve Bank of Australia); J. Daníelsson, (2002), The Emperor Has No Clothes: Limits to Risk Modelling, Journal of Banking and Finance, Vol. 26, pp. 1273– 1296; K. A. Chrystal and P. D. Mizen, (2001), Goodhart’s Law: Its Origin, Meaning and Implications for Monetary Policy, Essays in Honour of Charles Goodhart, Vol. 1, Cheltenham, Edward Elgar, London, pp. 221– 243. 400. In recent time: D. Prammer, (2011), Quality of Taxation and the Crisis: Tax Shifts from a Growth Perspective, Taxation Working Paper, Nr. 29. 401. Innovation is much more a state affair than one would assume upfront. Conventional wisdom puts innovation at the heart of private entrepreneurship. However, this can be considered incomplete. The failure to recognize the role of the government in driving innovation as a key enabler may well be the greatest threat to rising prosperity. See in detail: M. Mazzucato, (2013), The Entrepreneurial State: Debunking Public versus Private Sector Myths, Anthem Press, New York. 444 Notes

402. See for example in the environmental sphere: A. L. Bovenberg and R. A. de Mooij, (1995), Environmental Tax Reform and Endogenous Growth, Journal of Public Economics, Elsevier, Vol. 63, Issue 2, pp. 207– 237.

5 Applying Pigovian Taxes on a Regional Basis: The Quest for a Normative Model

1. There are many cost estimates available. The most recent research released regarding this matter demonstrated a cost greater than US$60 trillion; See: G. Whiteman, C. Hope, and P. Wadhams, (2013), Climate Science: Vast Costs of Arctic Change, Nature, Vol. 499, pp. 401– 403. 2. I refer to ‘regional’ reflecting regions in the world such as the EU. It does, however, involve multiple countries and therefore has cross- border implications (between countries). That use is distinct from the often used term ‘region’ in an EU context, which refers to regions (within one or more EU countries) characterized by a certain enhanced level of social, cultural, or economic cohesion. 3. See in detail: K. Ohmae, (2008), The End of the Nation State: The Rise of Regional Economies, HarperCollins, New York, pp. 56– 87, passim. 4. EC, (2011), Proposal for a Council Directive regarding a common corporate consolidated tax base (CCCTB) of the EC of March 16, 2011, Com(2011) 121/4. 5. Cnossen draws parallels between coordination of direct taxation and cartel formation in the corporate world as the ultimate aim on both counts is to produce a monopoly on what taxes, bases, and rates member states can organize their tax system (p. 28); see S. Cnossen, (2013), Meer fiscale diversiteit in de Europese Unie, Rijkers bundel, Prisma Print, Tilburg University, pp. 27– 46. 6. CCCTB proposal, Ibid. pp. 4– 5. 7. It could be argued that a true European corporate or income tax could be con- strued that poses none of the weaknesses of the proposed CCTB. However, since it is highly unrealistic in the current legislative and political landscape it will not be discussed further. It would help to avoid internal market distortions, reduce tax arbitrage, etc. By the same token it would ignore the heterogeneity of individual economies and the position of (corporate) income tax systems in those cultures and administrative practices and preferences. It would also impact economic growth depending on the level at which the (corporate) income tax rate would be set. 8. Serving the purpose of (1) defining the common consolidated tax base, (2) agreeing on the fundamental structural elements of a common consolidated tax base, (3) developing a mechanism for ‘sharing’ a consolidated tax base between member states, and (4) agreeing on a number of basic tax principles that should facilitate the CCTB. 9. He reviews both the top- down (pp. 39– 40) and bottom- up options (pp. 40– 43). 10. Economic Zone with a single currency. 11. R. M. Bird, (1989), Tax Harmonization in Federations and Common Market, in M. Neumann and K. W. Roskamp (eds.), Public Finance and Performance of Enterprises, Wayne State University Press, Detroit, pp. 139– 151. 12. S. Cnossen, (2013), Meer fiscale diversiteit in de Europese Unie, Rijkers bundel, Prisma Print, Tilburg University, pp. 44– 45. 13. R. Solow, (1956), A Contribution to the Theory of Economic Growth, The Quarterly Journal of Economics, Vol. 70, pp. 65– 94. The Harrod– Domar model is a development Notes 445

economics model of economic growth and is built around the idea of an economy’s growth rate in terms of the level of saving and productivity of capital. 14. An economic theory that outlines how a steady economic growth rate will be accomplished with the proper amounts of the three driving forces: labor, capital, and technology. The theory states that by varying the amounts of labor and capital in the production function, an equilibrium state can be accomplished. 15. P. M. Romer, (1986), Increasing Returns and Long- Run Growth, Journal of Political Economy, Vol. 94, pp. 1002– 1037; R. E. Lucas, (1988), On the Mechanics of Economic Development, Journal of Monetary Economics, Vol. 22, pp. 3– 42. 16. A. Sen, (1994), Growth Economics: What and Why?, in L. Pasinetti and R. Solow (eds.), Economic Growth and the Structure of Long- Term Development, IEA Conference held in Varenna, Italy, Vol. 112. 17. A. Pike, A. Rodríguez- Pose, and J. Tomaney, (2006), Local and Regional Development, Routledge, London; A. Pike, A. Rodríguez- Pose, and J. Tomaney, (2010), Handbook of Local and Regional Development, Routledge, London. 18. That includes such aspects as physical and soft (e.g. education, care, …) infrastructure. 19. See in extenso: A. Ascani, R. Crescenzi, and S. Iammarinno, (2012), Regional Economic Development: A Review, Working Paper 01/03, London School of Economics and Political Science. 20. A. J. Scott and M. Storper, (2003), Regions, Globalizations, Development, Regional Studies, Vol. 37, pp. 579– 593. 21. A. Ascani, R. Crescenzi, and S. Iammarinno, (2012), Regional Economic Development: A Review, Working Paper 01/03, London School of Economics and Political Science, p. 19. 22. R. Crescenzi and A. Rodríguez- Pose, (2011), Reconciling Top- Down and Bottom- Up Development Policies, Environment and Planning, A 43, pp. 773– 780. 23. A. Pike, A. Rodríguez- Pose, and J. Tomaney, (2006), Local and Regional Development, Routledge, London, pp. 83– 97. 24. European Monetary Union. 25. Conception of the single currency. 26. Introduction of the single currency. 27. P. Rozmahel, L. Kouba, L. Grochová, and N. Najman, (2013), Integration of CEE Countries: Increasing EU heterogeneity?, Working Paper Nr. 9, www.foreurope.eu. Their research was built on two fundamental questions: (1) what are the factors that distinguish between successful and less successful CEE countries in terms of the EU enlargement? and (2) how was heterogeneity in the EU developed during the last decade? 28. M. Höpner and A. Schäfer, (2012), Integration Among Unequals: How the Heterogeneity of European Varieties of Capitalism Shapes the Social and Democratic Potential of the EU, MPIfG Discussion Paper 12/5. 29. See Chapter 2, which detailed how the neoliberal ideologies emerged and converted over time into a much broader- based program, hence the term ‘neoliberal program’. 30. R. A. Dahl, (1999), Can International Organizations be Democratic? A Skeptic’s View, in I. Shapiro and C. Hacker- Cordón (eds.), Democracy’s Edges, Cambridge University Press, Cambridge, pp. 19– 36, in particular p. 20. 31. N. Lindstrom, (2010), Service Liberalization in the Enlarged EU: A Race to the Bottom or the Emergence of Transnational Political Conflict?, Journal of Common Market Studies, Vol. 48, pp. 1307– 1327. 446 Notes

32. P. Manow, A. Schäfer, and H. Zorn, (2008), Europe’s Party- Political Centre of Gravity, 1957– 2003, Journal of European Public Policy, Vol. 15, pp. 20– 39. 33. A. Schäfer, (2006), Resolving Deadlock: Why International Organizations Introduce Soft Law, European Law Journal, Vol. 12, pp. 194– 208. 34. J. Beckfield, (2006), European Integration and Income Inequality, American Sociological Review, pp. 964– 985; Ph. Genschel, A. Kemmerling, and E. Seils, (2011), Accelerating Downhill: How the EU Shapes Corporate Tax Competition in the Single Market, Journal of Common Market Studies, Vol. 49, pp. 585– 606. 35. See in detail: M. Ciccarelli, E. Ortega, and M. T. Valderrama, (2012), Heterogeneity and Cross- Border Spill- overs in Macro- Economic Financial Linkages, ECB Working Paper Series, Nr. 1498; F. Canova, M. Ciccarelli, and P. Dallari, (2013), Spillover of Fiscal Shocks in the Euro Area, Working Paper, ECB Conference November 28– 29, Heterogeneity in Currency Area; M. Cacciatore, (2013), Market Deregulation and Optimal Monetary Policy in a Monetary Union, Working Paper, ECB Conference Ibid.; M. Rubio, (2014), Macroprudential Policy Implementation in a Heterogeneous Monetary Union, Working Paper, ECB Conference, Ibid. and J. Ramajo, M. A. Márquez, G. D. J. Hewings, and M. M. Salinas, (2008), Spatial Heterogeneity and Interregional Spillovers in the European Union: Do Cohesion Policies Encourage Convergence Across Regions, European Economic Review, Vol. 52, Issue 3, pp. 551– 587. 36. J. König and R. Ohr, (2012), Homogeneous Groups within a Heterogeneous Community- Evidence from an Index Measuring European Economic Integration, Working Paper, Georg- August- Universität Göttingen. 37. H. Badinger, (2005), Growth Effects of Economic Integration: Evidence from the EU Member States, Review of World Economics, Vol. 141, Issue 1, pp. 50– 78; R. Baldwin, (2006), In or Out: Does it Matter? An Evidence- Based Analysis of the Euro’s Trade Effects, Center for Economic Policy Research, London. 38. P. De Grauwe, (2006), What Have We Learnt about Monetary Integration since the Maastricht Treaty?, Journal of Common Market Studies, Vol. 44, pp. 711– 730. F. P. Mongelli and J. L. Vega, (2006), What Effects is EMU having on the Euro Area and its Member Countries? An Overview, ECB Working Paper, Nr. 599. 39. L. Baele, A. Ferrando, P. Hördahl, E. Krylova, and C. Monnet, (2004), Measuring Financial Integration in the Euro Area, ECB Occasional Paper Series, Nr. 14. 40. E. Nowotny, P. Mooslechner, and D. Ritzberger- Grünwald, (2009), The Integration of European Labour Markets, Edward Elgar, Cheltenham. 41. F. P. Mongelli, E. Dorrucci, and I. Agur, (2007), What Does European Institutional Integration Tell Us About Trade Integration?, Integration and Trade, Vol. 11, Issue 26, pp. 151– 200. 42. How can we compare levels of integration over time and across regions? What assumptions are necessary to identify barriers to the integration of goods and factor markets? How can we estimate the effect of policy changes on integration if the policies themselves are endogenous? See in detail: V. Nitsch and N. Wolf, (2013), Introduction to Issue on Measuring Economic Integration, CESifo Economic Studies, Vol. 59, Issue 2, pp. 195– 198. 43. See in comparison: I. Arribas, F. Pérez, and E. Tortosa- Ausina, (2006), Measuring International Economic Integration: Theory and Evidence of Globalization, Working Paper; A. Cheptea, (2011), Border Effects and European Integration, Economics Studies Conference on Measuring Economic Integration Working Paper. Notes 447

44. See for the various layers or dimension in terms of globalization see: P. Ghemawat and S. A. Altman, (2013), Depth Index of Globalization 2013, And the Big Shift to Emerging Markets, IESE Business School, University of Navarra Report. 45. S. G. Chechetti, A. Sen, J. Caruana, R. Menon, and J. D. Uribe, (2012), The Future of Financial Globalization, BIS Papers Nr. 69 and P. R. Lane, (2012) Financial Globalization and the Crisis, BIS Working Paper Nr. 397. See also: S. Claessens and N. van Hooren, (2014), The Impact of the Global Financial Crisis on Banking Globalization, IMF Working Paper Nr. WP/14/197. 46. World Economic Forum, (2010), The Future of the Global Financial System, A Near- Term Outlook and Long- Term Scenarios, World Scenario Series. 47. Their financial depth is on average less than half that of the advanced economies as of 2012 (157% of GDP compared to 408% of GDP. See further McKinsey Global Institute, (2013), Financial Globalization: Reset or Retreat, Global Capital Markets Edition 2013. 48. D. Felix, (2003), The Past as Future? The Contribution of Financial Globalization to the Current Crisis of Neo- Liberalism as a Development Strategy, Working Paper Series Nr. 69, PERI, University of Massachusetts Amherst. 49. S. B. Kamin, (2010), Financial Globalization and Monetary Policy, Board of Governors of the Federal Reserve System International Finance Discussion Papers, Nr. 1002. 50. E. Heckscher, (1919), The Effects of Foreign Trade on the Distribution of Income, Ekonomisk Tidskrift, Vol. 21, pp. 497– 512. 51. B. Ohlin, (1967), Interregional and International Trade, Harvard University Press [1933], Cambridge, MA. 52. W. J. Baumol and A. S. Blinder, (2011), Economics: Principles and Policies, Cengage Learning, London, p. 50. 53. ‘If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage’. A. Smith, (2014), The Wealth of Nations, Simon and Brown [1776], New York, p. 133. 54. D. Ricardo, (2010), On the Principles of Political Economy and Taxation, Kessinger Publishing LLC [1817], Whitefish. 55. P. Krugman, (2010), A Globalization Puzzle, NY Times, February, 21. 56. ‘If capital freely flowed towards those countries where it could be most profitably employed, there could be no difference in the rate of profit, and no other difference in the real or labor price of commodities, than the additional quantity of labor required to convey them to the various markets where they were to be sold’ (D. Ricardo, (2010), On the Principles of Political Economy and Taxation, Kessinger Publishing LLC [1817], Whitefish. Chapter 7). 57. This is in contrast to the media attention focusing on capital flight each time a potential wealth tax is introduced. The issues with wealth taxes center more on the design, implementation, and enforcement of the tax, including what to include in its taxable base, and not the concept itself. Wealth tax implications cannot be evaluated without taking into account the collateral implications of aligned income and/or other taxes applicable at the same time. 58. The reference here is not only to hard or soft physical commodities, but also to other intellectual, financial, and infrastructural resources. 59. See for a detailed meaning of those assumptions D. Salvatore, (2007), International Economics, 9th Ed., Wiley & Sons, Hoboken, pp. 123– 124. 448 Notes

60. The initial two factor endowments are (1) capital and (2) labor. 61. See for a review of the results: W. R. Cline, (1997), Trade and Income Distribution, Institute for International Economics, Washington, pp. 183– 185. 62. A. Heston, R. Summers, and B. Aten, (2012), Penn World Table Version 7.1, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, https://pwt.sas.upenn.edu/php_site/pwt_index.php. 63. The strict version of the Heckscher– Ohlin model that assumes identical relative prices and technology is rejected in favor of more general alternatives. 64. Disaggregation here refers to the disentangling of the value chain within industries, where individual segments of the value chain are absorbed by different players, often from different industries. See, for example, in the case of healthcare: J. Srai and L. Alinaghian, (2013), Value Chain Reconfiguration in Highly Disaggregated Industrial Systems: Examining the Emergence of Health Care Diagnostics, Global Strategy Journal, Vol. 3, Issue 1, pp. 88– 108. Other industries prone to disaggregation are IT, retail, oil and gas, etc. 65. See S. Redding and M. Vera- Martin, (2006), Factor Endowment and Production in European Regions, Review of World Economics (Weltwirtschaftliches Archiv), Springer, Vol. 142, Issue 1, pp. 1– 32. The results of the different studies will not be reported or discussed in this work, as the focus remains on the usefulness of the H– O model within the context of a regional application of Pigovian taxes. The question of the (relative) factor characteristics of individual member states is therefore less relevant. 66. A. M. Ferraginna and F. Pastore, (2004), Factor Endowment and Market Size in EU- CEE Trade: Would Human Capital Change the Actual Quality Trade Patterns?, Eastern European Economics, Vol. 43, Issue 1, pp. 5– 33. 67. DG Regional Policy, (2009), A Study on the Factors of Regional Competitiveness. A Draft Final Report for the European Commission Directorate- General Regional Policy. 68. Y. Kandogan, (2005), Trade Creation and Diversion Effects of Europe’s Regional Liberalization Agreements, William Davidson Institute Working Paper Nr. 746. 69. See in detail: L. Fontagné, M. Freudenberg, and G. Gaulier, (2005), Disentangling Horizontal and Vertical Intra- Industry Trade, CEPII Working Paper. 70. Different types of trade are captured in measurements of intra- industry trade: (a) trade in similar products (‘horizontal trade’) with differentiated varieties (e.g. cars of a similar class and price range) and (b) trade in ‘vertically differentiated’ products distinguished by quality and price (e.g. exports of high- quality clothing and imports of lower- quality clothing); OECD, (2005), Measuring Globalisation: OECD Handbook on Economic Globalisation Indicators, OECD, Paris – Glossary. 71. M. Cabral, R. Falvey, and Chris Milner, (2013), Endowment Differences and the Composition of Intra- Industry Trade, Vol. 21, Issue 3 (August 2013), pp. 401– 418. 72. H. Berger and T. T. Moutos (eds.), (2004), Managing European Union Enlargement, CESifo Seminar Series, The MIT Press, Cambridge MA. 73. B. Dettori, E. Maroccu, and R. Paci, (2009), Total Factor Productivity, Intangible Assets and Spatial Dependence in the European Regions, Working Paper. 74. D. R. Davis and D. E. Weinstein, (1999), Economic Geography and Regional Production Structure: An Empirical Investigation, European Economic Review, Vol. 43, pp. 379– 407. 75. D. R. Davis and D. E. Weinstein, (2001), Do Factor Endowments Matter for North– North Trade?, NBER Working Paper Nr. 8516, republished in S. Marjit and E. Yu (eds.), (2008), Contemporary and Emerging Issues in Trade Theory and Policy, Elsevier, Notes 449

Amsterdam; K. L. Sokoloff and S. L. Engermann, (2000), Institutions, Factor Endowments, and Paths of Development in the New World, Journal of Economic Perspectives, Vol. 14, Issue 3, pp. 217– 232. 76. See also: E. E. Leamer, (1995), The Heckscher– Ohlin Model in Theory and Practice, Princeton Studies in International Finance, Nr. 77. 77. In fact, for the model to stand the tastes, distribution of income, and technology need to be ‘broadly similar’ and not identical. Equality in the theory is used to standardize the model, but involves simplification of the exposition. Technically, the model requires that if tastes differ, they do not differ sufficiently to neutralize the tendency of different factor endowments and production possibility curves to lead to different relative commodity prices and comparative advantage in the two nations. 78. See elsewhere in this section. Refer also to the discussion in Chapter 3 regarding the tension between economic models and reality ‘as such’. 79. See for a full overview of industries and complete analysis J. Romalis, (2004), Factor Proportions and the Structure of Commodity Trade, American Economic Review, Vol. 94, Issue 1, pp. 67– 97. 80. A. Minondo and F. Requena, (2011), Does Complexity Explain the Structure of Commodity Trade?, Working Paper. 81. A. P. Cusolito and D. Lederman, (2009), Technology Adoption and Factor Proportions in Open Economies: Theory and Evidence from the Global Computer Industry, World Bank, Working Paper. 82. G. Schaur, C. Xiang, and A. Savkhin, (2006), Factor Uses and the Pattern of Specialization, Purdue University Working Paper. 83. R. Zymak, (2010), Factor Proportions and the Growth of World Trade, Working Paper. 84. Notable contributions came from Paul Samuelson, Ronald Jones, and Jaroslav Vanek, so that variations of the model are sometimes called the Heckscher– Ohlin– Samuelson model or the Heckscher– Ohlin– Vanek model. 85. These variations will not be discussed here as they are numerous and do not contribute extensively towards the application of the H– O model to regional Pigovian taxes. It needs to be stressed though that none of the models referred to invalidates the basic proposition of the H– O model on which they are all built. What they try to achieve, though, is to build and extend the initial model with modules expanding its scope to reflect the evolving reality and/or based on a smaller/different set of assumptions. 86. S. B. Linder, (1961), An Essay on Trade and Transformation, Almqvist & Wicksell, Stockholm. 87. Including the Vanel Proportion Theorem. See J. Vanek, (1968), The Factor Proportions Theory: The N- Factor Case, Kyklos, Vol. 21, pp. 749– 756. The results based on this new statistical mode were unconvincing. See H. P. Bowen, E. E. Leamer, and L. Sveiskaus, (1987), Multi- country, Multifactor Tests of the Factor Abundance Theory, American Economic Review, Vol. 77, Issue 5, pp. 791– 809. 88. D. Trefler and S. C. Zhu, (2000), Beyond the Algebra of Explanation: HOV for the Technology Age, American Economic Review, Vol. 90, Issue 2, pp. 145– 149, and specifically regarding the location of production see J. R. Bernstein and D. E. Weinstein, (2002), Do Endowments Predict the Location of Production? Evidence From National and International Data, Journal of International Economics, Vol. 56, Issue 1, pp. 55– 76. For a confirmation of the model: D. R. Davis, D. E. Weinstein, S. D. Bradford, and K. Shimpo, (1997), Using International and 450 Notes

Japanese Regional Data to Determine When the Factor Abundance Theory of Trade Works, American Economic Review, Vol. 87, Issue 3, pp. 421– 446. 89. C. Edwards, (1985), The Fall of the Hecksher– Ohlin Theory, The Fragmented World: Competing Perspectives on Trade, Money, and Crisis, Methuen, London and New York, pp. 29– 40 and F. Stewart, (1989), Recent Theories of International Trade: Some Implications for the South, in H. Kierzkowski (ed.), Monopolistic Competition and International Trade, Clarendon Press, Oxford, pp. 84– 108, claim- ing that the Heckscher– Ohlin theory is badly adapted to analyze south– north trade problems. 90. The standard Heckscher– Ohlin model assumes that the production functions are identical for all countries concerned. This means that all countries are in the same level of production and have the same technology, yet this is highly unrealistic. The standard Heckscher– Ohlin model ignores all these vital factors when considering the development of less developed countries in an international context. Even between developed countries technology differs from industry to industry and firm to firm. Indeed, this is the very basis of the competition between firms, inside the country and across countries. See Ibid. 91. In the modern production systems, what is referred to as capital is nothing other than those machines and apparatuses, together with materials and intermediate products which will be consumed in the production process. But capital is not an endowment given by nature. Capital is a production power accumulated by the past investment. 92. Capital can take many different forms. Capital in the Hechscher– Ohlin model is assumed to be homogeneous and transferable to any form if necessary. In the Heckscher– Ohlin model the rate of profit is determined according to how abundant capital is. If capital is scarce, it has a high rate of profit. If it is abundant, the profit rate is low. This is a logical circle. Before the profit rate is determined, the amount of capital is not measured. See A. J. Cohen and G. C. Harcourt, (2003), Whatever Happened to the Cambridge Capital Theory Controversies?, Journal of Economic Perspectives, Vol. 1, Issue 1, pp. 199– 214. 93. The Heckscher– Ohlin theory excludes unemployment by the very formulation of the model, in which all factors (including labor) are employed in production – see Y. Shiozawa, (2009), Samuelson’s Implicit Criticism against Sraffa and the Sraffians and Two Other Questions, The Kyoto Economic Review, Vol. 78, Issue 1, pp. 19– 37. 94. M. Melitz, (2003), The Impact of Trade on Intra- Industry Reallocations and Aggregate Industry Productivity, Econometrica, Vol. 71, Issue 6, pp. 1695– 1725; D. Greenaway and R. Kneller, (2007), Firm Heterogeneity, Exporting and Foreign Direct Investment, The Economic Journal, Vol. 117, Issue 517, pp. 134– 161. 95. For example the New Trade Theory, the New New Trade Theory, the Gravity Model of Trade and the Ricardo– Sraffa Trade Theory. They all change some of the initial assumptions of the H– O model, but not its essential dynamics. These alternative models are not discussed in this context, as only the H– O mechanism will be relevant going forward in the context of the Pigovian taxes. See for a detailed review of these models and an evaluation D. Salvatore, (2007), International Economics, Wiley & Sons, Hoboken, Chapter 6, pp. 173– 198. 96. K. H. O’Rourke, (2003), Heckscher– Ohlin and Individual Attitudes Towards Globalization, NBER Paper Nr. 9872, published in R. Findlay, R. Henriksson, H. Lindgren, and M. Lundahl (eds.), (2006), Eli Heckscher, International Trade, and Economic History, MIT Press, Cambridge, MA. Notes 451

97. See K. H. O’Rourke and J. F. Williamson, (2000), The Heckscher– Ohlin Model Between 1400 and 2000: When It Explained Factor Price Convergence, When It Did Not, and Why, CEPR Discussion Papers, Nr. 2372. 98. Using the aforementioned Varek statistical tool. See also for a similar conclusion: D. Hakura, (1999), A Test of the General Validity of the Heckscher– Ohlin Theorem for Trade in the European Community, IMF Working Paper, WP/99/70. 99. E. Fisher and K. G. Marshall, (2013), Testing the Heckscher– Ohlin– Vanek Paradigm in a World with Cheap Foreign Labor, California Polytech State University Working Paper, who in the same token criticize the former conventional practice of measuring the impact that countries have different technologies. Those tests were based upon aggregating physically homogenous units, such as hectares of land or person- years of skilled labor, to predict which countries are abundant in which factors. These scholars make adjustments for the quality of a factor and base predictions upon efficiency units, but they are still adding physical units of quality- adjusted factors. Fischer and Marshall comment: ‘This practice is wrong, and it is responsible for the horribly inaccurate predictions about the direction of the factor content of trade. Since the predictions are wrong, the rejections of the theory are spurious’ (p. 1). See for their approach pp. 1– 2. 100. Comparing factors of different countries without adjustments to account for different levels of productivity would be highly incorrect. Therefore the factors are recalculated to reflect internationally comparable efficiency units; see Fisher and Marshall, Ibid. pp. 10– 16 for the technicalities of the conversion. 101. Summarized by author. 102. D. Trefler, (1995), The Case of the Missing Trade and Other Mysteries, American Economic Review, Vol. 85, Issue 5, pp. 1029– 1046. 103. E. Fisher and K. G. Marshall, (2013), Testing the Heckscher– Ohlin– Vanek Paradigm in a World with Cheap Foreign Labor, California Polytech State University Working Paper, pp. 42– 43. 104. C. Bajona and T. J. Kehoe, (2010), Trade, Growth, and Convergence in a Dynamic Heckscher– Ohlin Model, Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Vol. 13, Issue 3, pp. 487– 513. 105. International convergence of income levels is a typical result of globalization. However, income disparity seems to widen domestically within countries when formerly closed economies are opened up. 106. Those countries that demonstrate low levels of cross- border trade and investments. 107. Those with a GDP/capita level below global average and in particularly those in the first quartile (lowest 25%). 108. Although there are scholars who argue that those dynamic models are based on simple empiricism. See: T. Subasat, (2003), What Does the Heckscher– Ohlin Model Contribute to International Trade Theory? A Critical Assessment, University of Bath, Working Paper. 109. That is, the traditional north– north and north– south patterns, but also the newer generation and emerging south– south and south– north trade patterns. 110. W. Easterly, (2007), Globalization, Poverty and All That, Factor Endowments versus Productivity Views, NBER Paper, published in E. Harrison (ed.), Globalization and Poverty, University of Chicago Press, Chicago. 111. However, the existence of intra- industry trade requires the adoption of New Trade Theory terminology. Therefore certain facts about EU reality are 452 Notes

confronted with the assumptions of the model in order to evaluate the degree of its applicability. See: D. I. Rongotis, (2009), Assessing European Economic Integration with the Heckscher– Ohlin Model, a Comparison between Germany and Greece, Økonomisk institutt Working Paper. 112. The Heckscher– Ohlin– Vanek model which compares the factor content of net trade with factor abundance. 113. A. Srivastava, (2012), Heckscher Ohlin Vanek Theorem: An Excess Supply Approach, Kanpur, Indian Institute for Technology Working Paper and H. Lai and S. C. Zhu, (2007), Technology, Endowments, and the Factor Content of Bilateral Trade, Journal of International Economics, Vol. 71, pp. 389– 409. 114. See extensively Fisher and Marshall, Ibid., who review the individual scholarly practices (endnotes 99 and 103 of this chapter). 115. Given the set of assumptions, Heckscher and Ohlin most likely would not have envisaged it otherwise. 116. With the notable exception of border buyers who shop cross- border, often triggered by different levels of excise on alcohol- containing liquors, fuels, or packaging levies. 117. Refer to the discussion in Chapter 4, where it was highlighted that redistribution of wealth is not limited to redistribution from high to low earners, but also in terms of what types of taxes or what types of behaviors will be taxed.

118. It was argued before in Chapter 4 why the existing CO2 cap- and- trade model as applied in the EU does not meet the technical criteria of a Pigovian tax. 119. The Heckscher– Ohlin–( Stolper–)Samuelson variant to be precise (also known as the strong version of the H– O model, which assumes preferences are homo- thetic, i.e. demand for products is proportional across nations). It postulates that relative changes in output goods prices will drive the relative prices of the factors used to produce them. If the world price of capital- intensive goods increases for example, it will increase the relative rental rate as well as decrease the relative wage rate (the return on capital as against the return to labor). Also, if the price of labor- intensive goods increases, it will increase the relative wage rate as well as decrease the relative rental rate. 120. This reflects today’s conundrum where the lower levels of tolerance of developing economies for emission taxes of some sort can be explained, although this assumes the unrealistic identical preference of taste in different countries. In very recent times however, we have seen a relaxation at the level of developing nations towards curbing pollution (judged on their behaviors and contributions during the UN Climate Change Conference 2014 in New York, 2013 in Warsaw, and 2012 in Doha), as their emissions converge both in absolute and relative terms (i.e. per capita) with the levels observed in the developed nations and their understanding of the long- term negative impact on economic growth in the developing nations increases. 121. This result is consistent with some empirical observations on environmental policy in industrialized countries as compared with policy newly developing countries. See R. E. Kohn, (1991), Global Pollution: A Heckscher– Ohlin– Samuelson Model of Pigouvian Taxes, Eastern Economic Journal, Vol. XVII, Issue 3, pp. 337– 343. 122. It is calculated by dividing the value of exports by the value of imports, then multiplying the result by 100. If a country’s terms of trade is less than 100%, there are more capital outflows (to buy imports) than there are capital inflows. A result greater than 100% means the country is accumulating capital (more Notes 453

money is coming in from exports). The terms of trade are directly impacted by changes in export and import prices. It therefore refers to the relative price of exports in terms of imports and is defined as the ratio of export prices to import prices. It can be interpreted as the amount of import goods an economy can purchase per unit of export goods. An improvement in a nation’s terms of trade benefits that country in the sense that it can buy more imports for any given level of exports. The terms of trade may be influenced by the exchange rate because a rise in the value of a country’s currency lowers the domestic prices of its imports, but may not directly affect the prices of the commodities it exports. 123. J. D. Merrifield, (1988), The Impact of Selected Abatement Strategies on Transnational Pollution, the Terms of Trade, and Factor Rewards. A General Equilibrium Approach, Journal of Environmental Economics and Management, Vol. 15, Issue 3, pp. 259– 284. All models have in common that they use a general equilibrium model as benchmark, but a different number of countries are used, who produce a different composite good, and have some level of price- setting power and takes into account the dynamics of the flow of capital between the countries involved. 124. R. E. Kohn, (1998), Environmental Protection by One or Both Trading Partners in a Heckscher– Ohlin– Samuelson Model, Open Economies Review, Vol. 9, Issue 4, pp. 327– 342. 125. Which embodies mathematical models of conflict and cooperation between intelligent rational decision- makers. See: R. B. Myerson, (1991), Game Theory: Analysis of Conflict, Harvard University Press, Cambridge, MA, pp. vii– xi. 126. R. López, (1994), Environment as a Factor of Production: The Effects of Economic Growth and Trade Liberalization, Journal of Environmental Economics and Management, September, pp. 163– 184. 127. R. E. Kohn, (2000), The Effect of Environmental Taxes on the Volume of International Trade, Ecological Economics, Vol. 34, pp. 77– 87. His paper was developed based on an earlier question posed by Røpke: ‘If it were possible to internalize all external costs’ he questions whether the ‘relatively dramatic changes of relative prices’ would cause international trade to ‘increase or decrease’? Neither prospect is necessarily bad from Røpke’s perspective, for an increase in trade can beneficially ‘increase the biophysical carrying capacity of the world’, whereas a decrease can fortuitously promote the ‘self- sufficiency’ of individual countries. See in detail: I. Røpke, (1994), Trade, Development and Sustainability – A Critical Assessment of the Free Trade Dogma, Ecological Economics, Vol. 9, pp. 13– 22. See for Kohn’s intermittent reporting: R. E. Kohn, (1997), Internalizing International Versus Domestic Damages of a Pure Global Pollutant: An Extension of Musgrave and Shibata, Public Finance: Finances Publiques, Vol. 52, pp. 145– 156; R. E. Kohn, (1998), Pollution and the Firm, Edward Elgar, Cheltenham; R. E. Kohn, (1998), Environmental Protection by One or Both Trading Partners in a Heckscher– Ohlin– Samuelson Model, Open Economics Review, Vol. 9, pp. 327– 342; R. E. Kohn and P. E. Chambers, (2000), Pollution Abatement and International Self- Sufficiency, Eastern Economic Journal, Vol. 26, Issue 2, pp. 213– 219. 128. The conclusions in his paper are based on a model in which emissions remain in the country of origin, so that pollution damage and the relative environmental tax vary from country to country. This drives the strong results of the presented model. When emissions are freely transported across national boundaries and pollution damage is additive across countries, the real Pigovian 454 Notes

tax is uniform: ‘When the present model is run with transfrontier damage, all three countries respond to the uniform, global tax by decreasing their production of the pollutive good and increasing that of the receptor good. The effect on the volume of trade is less than in the present model, in which the tax is not uniform and marginal damage depends only on domestic emissions’ (p. 87). 129. L. Summers, (2014), The Inequality Puzzle, Democracy, Issue 34, Spring 2014.

6 A Pigovian Approach in a Globalizing Financial Industry

1. Ph. Stevens, (2014), Nothing Can Dent the Divine Right of Bankers, Financial Times, January 16. 2. L. Nijs, (2011), Shaping Tomorrow’s Marketplace: Investment Philosophies for Emerging Markets and a Semi- Globalized World, Euromoney, London, pp. 145– 159. 3. H. Gribnau, (2007), Soft Law and Taxation: The Case for the Netherlands, Legisprudence, Vol. 1, Issue 3, pp. 296– 297. See also H. Gribnau, (2008), Soft Law and Taxation: EU and International Aspects, Legisprudence, Vol. 2, Issue 2, pp. 67– 117. 4. L. Senden, (2005), Soft Law, Self- Regulation and Co- Regulation in European Law: Where Do They Meet?, Electronic Journal of Comparative Law, Vol. 9, p. 17. See in detail regarding soft law: U Mörth (ed.), (2004), Soft Law in Governance and Regulation: An Interdisciplinary Analysis, Edward Elgar Publishing, Cheltenham. 5. They carried weights of 0% (for example cash, bullion, home country debt like Treasuries), 20% (securitizations such as mortgage- backed securities (MBS) with the highest AAA rating), 50%, and 100% (for example, most corporate debt), with some assets given ‘No rating’. Banks with an international presence were required to hold capital equal to 8% of their risk- weighted assets (RWA). 6. The four objectives of Basel II were: (1) ensuring that capital allocation is more risk- sensitive, (2) enhanced disclosure requirements which will allow market participants to assess the capital adequacy of an institution, (3) ensure that credit risk, operational risk, and market risk are quantified based on data and formal techniques, and (4) an attempt to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage. 7. Regulatory capital is the amount of capital that a bank or other financial institution has to hold as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity that must be held as a percentage of risk- weighted assets. The whole idea is that given the level of risk that the bank holds on its balance sheet, a certain level of capital should be adequate to absorb any potential losses that might occur from risk exposures or sudden devaluations of certain asset prices in order to stabilize the FI and keep it afloat. 8. The Internal Capital Adequacy Assessment Process (ICAAP) is the result of Pillar II of the Basel II accords. 9. See extensively: L. Nijs, (2014), Mezzanine Financing: Tools, Applications and Total Return, Wiley & Sons, London, in general, but in particular the chapter on FIs. 10. Average leverage in other industries is around 35– 45% of total funding and significantly up from two or three decades ago where it was only on average 20%. In the financial industry the leverage is often has high as 96%, and before the crisis 98%, of total funding. See in detail: A. Admati and M. Hellwig, (2013), The Bankers New Clothes: What’s Wrong with Banking and What to Do About It, Princeton University Press, Princeton, NJ, Chapter 1. Notes 455

11. J. Danielsson, (2002), The Emperor has No Clothes: Limits to Risk Modeling, Journal of Banking and Finance, Vol. 26, pp. 1273– 1296 and N. N. Taleb, (2010), The Black Swan: The Impact of the Highly Improbable, 2nd Ed., Random House Trade paperbacks, New York. 12. See in detail: Basel Committee on Banking Supervision (BIS), (2011), Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems and Basel Committee on Banking Supervision, (2013), Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools. 13. Consider also the permanent updates the BIS provides clarifying many technical issues: BIS, (2014), FAQs on Basel III’s January Liquidity Coverage Ratio; BIS, (2012), FAQs on Counterparty Credit Risk and Exposures to Central Counterparties and BIS, (2011), FAQs Regarding the Definition of Capital, and BIS, (2011), FAQs Regarding the Framework for Liquidity. 14. The original Capital Requirements Directive (CRD I) comprises Directives 2006/48/EC and 2006/49/EC. Capital Requirements Directive II (CRD II) comprises Directives 2009/27/EC, 2009/83/EC, and 2009/111/EC. Capital Requirements Directive III (CRD III) comprises directive 2010/76/EC. CRD II and CRD III amended the Directives that comprise CRD I. The Basel III principles have been implemented through a Directive (Directive 2013/36/EU of the European Parliament and of the Council of June 26, 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, OJ L 176, 27/06/2013, p. 338– 436 ) which needed to be transposed in national law by January 1, 2014 and an aligned Regulation (Regulation (EU) No 575/2013 of the European Parliament and of the Council of June 26, 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 Text with EEA relevance , OJ L 176, 27/06/2013, pp. 1– 337). The CRD I, II, and III were repealed on December 31, 2013. The Directive and Regulation are known as the CRD IV package. 15. See in detail also historically: M. A. Centeno and J. N. Cohen, (2012), The Arc of Neoliberalism, Annual Review of Sociology, Vol. 38, pp. 317– 340. 16. See in detail: A. Greenspan, (2008), The Age of Turbulence: Adventures in a New World, Penguin Books, New York. After the 2008 crisis he converted and claimed that he has had to backtrack on his initial belief that (financial) markets can be self- policing and explicitly stepped away from the neoliberal policies he endorsed for decades. 17. Or to be precise (1) destruction does not always have to be creative and (2) not every creativity is destructive. 18. In the City of London, the financial sector accounted for 40% of all UK corporate income tax revenues in the years running up to the crisis. This has fallen, but its corporate tax contributions still account for about 10% of all tax UK tax revenues (2010), and far beyond that taking into account VAT etc. For details see: PWC, (2010), The Total Tax Contribution of UK Financial Services, 3rd ed., London. 19. In fact that is true for the wider sovereign in all its aspects including the DOJ (‘Department of Justice’). See in detail: B. L. Garrett, (2014), Too Big to Jail: How Prosecutors Compromise with Corporations, Harvard University Press, Cambridge, MA. 20. Countless examples can be given regarding the predatory nature of the FI: From the libor manipulation to FIs taking trading positions against their clients, under- highlighting certain risks, to driving SME clients into bankruptcy/insolvency in order to pick up quality assets at bottom prices. 456 Notes

21. That is the case for most Western nations. 22. See B. O˝ztürk and M. Mrkaic, (2014), SME’s Access to Finance in the Euro Area: What Helps or Hampers, IMF Working Paper, WP/14/78; R. Bannerjee, (2014), SME’s, Financial Constraints and Growth, BIS Working Paper Nr. 475. 23. And less capital required means under constant performance a higher return on equity (ROE) for the FI. 24. See in detail: C. Bonner, (2014), Preferential Regulatory Treatment and Bank’s Demand for Government Bonds, DNB Working Papers, Nr. 433. 25. In the EU the LTRO ( Long- Term Refinancing Operation) and in the USA the scaled quantitative easing (QE) program were the major programs initiated. 26. Also in the post- 2008 world the EMH (efficient market hypothesis), which assumes that markets are constantly rational and therefore price assets (and their embedded risk) appropriately, does not stand. 27. See in extenso: R. Mohan and M. Kapur, (2014), Monetary Policy Coordination and the Role of Central Banks, IMF Working Paper, WP/14/70. 28. See in detail F. Lambert and K. Ueda, (2014), The Effects of Unconventional Monetary Policy on Bank Soundness, IMF Working Paper WP/14/152. Through the mechanism of globalization, this phenomenon has resulted not only in FIs being impacted by those policies, but also the clients they serve, including in emerging economies, where the economic infrastructure overall is more suscep- tible to shocks; see M. Chui, I. Fender, and V. Sushko, (2014), Risks Related to EME Corporate Balance Sheets: The Role of Leverage and Currency Mismatch, BIS Quarterly Review (September), pp. 35– 47. 29. See for the issues with the current regulatory framework and some alternatives suggested: C. Fullenkamp and C. Rochon, (2014), Reconsidering Bank Capital Regulation: A New Combination of Rules, Regulators and Market Discipline, IMF Working Paper, Nr. WP/14/169. 30. Ibid. pp. 4– 9. 31. V. Acharya et al., (2013), Testing Macroprudential Stress Tests: The Risk of Regulatory Risk Weights, NYU Stern, Working Paper. They show that the risk measures used in risk- weighted assets are cross- sectionally uncorrelated with market measures of risk as they do not account for the ‘risk that risk will change’. Furthermore, the firms that appeared to be best capitalized relative to risk- weighted assets were no better than the rest when the European economy deteriorated into the sovereign debt crisis in 2011. Other elements play a role, for example the (il)liquidity of the assets held by the bank; see: H. Tomura, (2014), Asset Illiquidity and Dynamic Bank Capital Requirements, International Journal of Central Banking, Vol. 10, Issue 3, pp. 291– 317. 32. See for an overview of FS taxation in the EU: European Commission, (2010), Financial Sector Taxation, EC Taxation Papers Series, Working Paper Nr. 25. 33. In many other countries that was the case as well. See for an overview: V. Mendoza, P. Carville, and B. Larking, (2011), Bank Taxes: Variations on a Theme, Derivatives and Financial Instruments, Vol. 13, Issue 4, pp. 222– 230. 34. Wet Bankenbelasting, Staatsblad (Official Gazette) 2012, p. 325. 35. Kamerstukken (Parliamentary Documents) II 2011– 2012, 33 121, Nr. 3, p. 2. 36. In practical terms it means that the regulator was of the opinion that the FIs had an enhanced accountability and that that justified an enhanced contribution towards reducing the government deficit caused by the massive lending needed on the part of the sovereign to materialize the bailout. The bank tax does not mathematically try to equate the exact cost of the bailout mechanism. The taxes Notes 457

raised in this respect will also not be isolated for the purposes of future issues in this sector but will flow to the general means of the sovereign and be used at its discretion. 37. Although the Dutch government indicated that this was not the idea. See: Kamerstukken (Parliamentary Documents) II 2009/10, 31 980, Nr. 9, p. 10; Kamerstukken (Parliamentary Documents) II 2010/11, 21 501- 07, Nr. 791, p. 15. 38. The difference in rates is governed by the remaining term of the debts as at the balance sheet date, facilitating redemption and refinancing when long- term debt becomes current debt in its final year. 39. P. Kavelaars, (2012), Netherlands Bank Tax Introduced, European Taxation (August), paragraph 3.3., pp. 437– 442. Van der Geld seems to agree, although not explicitly – see J. Van der Geld, (2013), Bankenbelasting: de foute oplossing voor een echt probleem, Rijkers Bundel, Prisma Print, Tilburg University, pp. 115– 120. 40. P. Kavelaars, (2012), Netherlands Bank Tax Introduced, European Taxation (August), paragraph 3.3., p. 441. 41. Which equals the rate(s) they charge to their customers and the cost of funding for the bank. In general accounting terms the gross interest margin for a bank (at least regarding their lending activities) equals the gross margin for other corporations. 42. With variations based on what is financed. The longer the term of the loans financed in the market the higher the interest rate. This is the direct consequence of the opportunity cost of capital principle, i.e. capital that is locked away for a longer period of time will trigger a higher interest rate as that amount of capital cannot be put to work elsewhere for a long period of time, even if better risk- adjusted opportunities would occur in the market. That loss of agility comes at a higher cost. 43. MMFs are essentially open- ended mutual funds that only invest in short- term risk- free (or near risk- free) debt instruments. They are therefore known for their high level of liquidity. Investors tend to use these vehicles as a quasi- bank account in order to generate a slightly higher return. Access to the full principal amount of their investment at all times is a pre- condition. 44. And which has triggered new regulation on MMFs in both the USA and Europe: see for Europe: Proposal for a Regulation of the European Parliament and of the Council on Money Market Funds, Com(2013) 615 final of September 9, 2013. Given their high level of liquidity these were the first vehicles to be impacted when the market shake- out started and a fire sale was initiated. A ‘fire sale’ can be defined as any sale that investors engage in, under distress, selling assets below their intrinsic value in order to provide liquidity to their customers or to meet proprietary liabilities. 45. The regulators turn the tables on the issue: The Dutch government stated that research has shown that short- term funding accelerated the spreading of liquidity problems in the banking sector in recent years (Kamerstukken (Parliamentary Documents) II, 2011/12, 33 121, Nr. 4, p. 7). 46. It does not really differentiate how a bank is financed relative to others and the cost will most likely be pushed forward to the bank’s customers (see also J. Van der Geld, (2013), Bankenbelasting: de foute oplossing voor een echt probleem, Rijkers Bundel, Prisma Print, Tilburg University, p. 117). 47. Com(2011) 594 final of September 28, 2011. 48. Com(2013)71 of February 2013, Proposal for a Council Directive implementing enhanced cooperation in the area of financial transaction tax. 458 Notes

49. At the time of writing 11 countries have signed up. Expected implementation is foreseen by 2016. The legal basis was article 113 TFEU and Council Decision 2013/52/EU of January 22, 2013 authorizing enhanced cooperation in the area of financial transaction tax authorized the Member States listed in its Article 1 to establish enhanced cooperation in the area of FTT, O.J. L 22, 25.1.2013, p. 11. 50. Com(2013)71 of February 2013, Ibid. pp. 2 & 4. 51. See Chapter 1 of the proposal for details. 52. The Dutch Bureau for Economic Policy Analysis on December 21, 2011 in their note ‘Evaluatie van de financiële transactiebelasting’ already, based on the 2011 FTT proposal, concluded that there is ‘little evidence that the introduction of a financial transaction tax within the EU will be effective in correcting market failures, and finds that other taxes are likely to be more efficient in raising revenues, involving lower deadweight losses’ (pp. 6– 9). The Dutch Central Bank also finds the introduction of a financial transaction tax within the European Union unde- sirable. See DNBulletin (February 6, 2012). 53. D. Hirschleifer and S. H. Teoh, (2009), Systemic Risk, Coordination Failures and Preparedness Externalities, Journal of Financial Economic Policy, Vol. 1, Issue 2, pp. 128– 142. 54. V. Acharya and P. Volpin, (2007), Corporate Governance Externalities, London Business School and Centre for Economic Policy Research (CEPR) Working Paper. 55. V. V. Acharya, H. Le, and H. S. Shin, (2013), Bank Capital and Dividend Externalities, Princeton/NYU Working Paper Series. 56. Those risks that, when they occur, only impact the party/parties involved in the transaction. 57. Those risks that when they occur impact not only the engaged party/parties but also third parties. 58. See for a detailed analysis of systemic risk: O. de Bandt and Ph. Hartmann, (2011), What is Systemic Risk Today, ECB Working Paper, pp. 37– 83 (original ECB Paper 2000), in particular pp. 40– 48. See in general: O. de Bandt, Ph. Hartmann and J. L Peydró, Systemic Risk in Banking, in A. N. Berger, P. Molyneux, and O. S. Wilson (eds.), The Oxford Handbook of Banking, Oxford University Press, Oxford; G. G. Kaufman and K. E. Scott, (2003), What is Systemic Risk and Do Bank Regulators Retard or Contribute to it, The Independent Review, Vol. VII, Issue 3, pp. 371– 391. 59. Underlying contagion risk lies coordinated game theory (i.e. behaviors of market participants are (partly) determined by behaviors of other market participants). Or specifically in this case, withdrawals at one bank trigger withdrawals at another bank by increasing players’ beliefs that other depositors in their own bank will withdraw, making them more likely to withdraw as well. The level of contagion is higher the higher the FIs are interrelated; see in detail: M. Brown, S. Trautmann, and R. Vlahu, (2014), Understanding Bank- Run Contagion, Working Paper Series Nr. 1711. 60. S. Titman, (2013), Financial Markets and Investment Externalities, The Journal of Finance, Vol. 68, Issue 4, pp. 1307– 1329. 61. For example caused by a fire sale (financial accelerator) of collateral assets (pecuniary externality) undervaluing liquidity. See M. Miller and L. Zhang, (2011), Whither Capitalism. Financial Externalities and Crisis, Warwick Working Paper or coordination problems (information- based runs, etc.). 62. Systemic risk is the danger of economy- wide financial feedback effects whereby adverse economic shocks force market participants to sell assets in order to raise liquidity, and the sales in turn push down asset prices and force them to sell even Notes 459

more of their asset holdings. On the productive side of the economy, this is mir- rored in declines in output. 63. A. Korinek, (2011), Systemic Risk Taking: Amplification Effects, Externalities and Regulatory Responses, ECB Working Paper Series, Nr. 1345. He asserts: ‘Even though they (individual market participants (ed.)) may have access to a complete market to insure against systemic risk, they insure to a socially inefficient extent because when they trade off the costs and benefits of insurance, they do not internalize the social benefits of insurance in the form of mitigating the economy- wide fire sales. By contrast, a policymaker has the capacity to internalize this externality and make everybody better off by inducing financial market participants to reduce their systemic risk- taking. This in turn will lead to lower fire sales, smaller price declines and greater macroeconomic stability’ (p. 5). 64. Although regulating and taxing do not constitute the same dynamics, they do remind us of the stand- off occurring in the FI sector between fiscal instruments and command- and- control legislation, all trying to achieve the same objective, but in different ways: the stability of the financial markets and the mitigating of risk exposures. 65. See in extenso: D. Masciandaro, and F. Passarelli, (2013), Financial Systemic Risk: Taxation or Regulation, Journal of Banking and Finance, Vol. 37, Issue 2, pp. 587– 596. 66. Ibid. pp. 694– 596. 67. The traditional command- and- control legislation as embodied by the CRD pack- ages lately updated in 2014 (CRD IV). 68. Through a thorough revamp (proposal of July 12, 2010, recast, Com/2010/0368 final) of the Deposit Guarantee Scheme Directive: Directive 94/19/EC of the European Parliament and of the Council of May 30, 1994 on deposit- guarantee schemes, O.J. L 135, May 31, 1994, pp. 5– 14. The proposal was approved by the European parliament on April 15, 2014 and published in June 2014: Directive 2014/49/EU of the European Parliament and of the Council of April 16, 2014 on deposit guarantee schemes, O.J. L 173, pp. 149– 179. 69. In its most extensive form, a financial activities tax is assessed on total profit and wages, and can be viewed as a tax on a proxy for total value added by a financial sector company. The European Commission views a financial activities tax as a potential solution to the current VAT exemption of financial services, which the commission feels provides (undesired) benefits to the financial sector. See Com(2010)549 final, Communication regarding taxation of the financial sector of October 7, 2010). A proposal for a financial activities tax has not been released, most likely because it has focused on the introduction of the FTT and because it requires an assessment of the interaction with the VAT system if introduced. See also: V. van der Lans, (2012), The Proposed Bank Tax: To Tax or Not To Tax, Derivatives and Financial Instruments, IBFD, pp. 52– 62. 70. At least technically in its purest form. 71. À la Capital Requirement Directive (CRD). 72. A similar conclusion was reached by M. Keen, (2011), The Taxation and Regulation of Banks, IMF Working Paper, WP/11/206. He concludes: ‘The results suggest a potential role for taxing bank borrowing, perhaps as an adjunct to minimum capital requirements, at marginal rates that rise quite sharply at low capital ratios, reaching levels higher than those of the bank taxes so far adopted or proposed’ (p. 30). He observed externalities in two different fashions: those that arise when such institutions are simply allowed to collapse, and those that arise 460 Notes

when, to avoid the harm this would cause, their creditors are bailed out. He also asks whether corrective taxation or a regulatory capital requirement is the better way to address these concerns (above); See also M. Keen, (2011), Rethinking the Taxation of the Financial Sector, CESifo Economic Studies, Vol. 57, Issue 1, pp. 1– 24. 73. The High- level Group on Financial Supervision in the EU, (2009), chaired by J. de Larosière. 74. High- level Expert Group on Reforming the Structure of the EU Banking Sector, (2012) chaired by E. Liikanen. 75. See also S. Titman, (2013), Financial markets and Investment Externalities, The Journal of Finance, Vol. 68, Issue 4, pp. 1307– 1329. 76. G. S. Eskeland, (1994), A Presumptive Pigovian Tax Complementing Regulation to Mimic an Emission Fee, World Bank Economic Review, Vol. 8, Issue 3, pp. 373– 394. 77. J. E. Stiglitz, (1989), Using Tax Policy to Curb Speculative Short- term Trading, Journal of Financial Services Research, Vol. 3, pp. 101– 115. 78. A. R. Admati, P. M. DeMarzo, M. F. Hellwig, and P. Pfleiderer, (2010), Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive, Stanford Graduate School of Business Research Paper Nr. 2065. 79. V. Acharya, T. Phillippon, M. Richardson, and N. Roubini, (2009), Financial Markets, Institutions and Instruments, Vol. 18, Issue 2, pp. 89– 137. 80. K. R. French et al. (2010), The Squam Lake Report: Fixing the Financial System, Princeton University Press, Princeton. 81. D. Masciandaro and F. Passarelli, (2013), Financial Systemic Risk: Taxation or Regulation, Journal of Banking and Finance, Vol. 37, Issue, 2 , pp. 586– 596; L. Kaplow and S. Shavell, (2002), On the Superiority of Corrective Taxes to Quantity Regulation, American Law and Economics Review, Vol. 4, Issue 1, pp. 1– 17. 82. The revenue- based models will not be extensively analyzed in the main analysis of this chapter, which will focus on externality- neutralizing instruments. Revenue- based models will however be subject to a limited analysis in Section 6.5.2. regarding alternative models of taxation for FIs. See for extensive coverage of the different models designed and suggested in recent years: M. Keen, (2011), The Taxation and Regulation of Banks, IMF Working paper Series, WP/11/206 and M. Keen and R. A. de Mooij, (2012), Debt, Taxes and Banks, IMF Working Paper Series, WP/12/48; S. Claessens et al. G. Dell’ Arriccia, D. Agiz, and L. Laeven, (2010), Lessons and Policy Implications from the Global Financial Crisis, IMF Working Paper Series, WP/10/44; R. A. de Mooij and M. P. Devereux, (2011), An Applied Analysis of ACE and CBIT Reforms in the EU, International Tax and Public Finance, Springer, Vol. 18, Issue 1, pp. 93– 120; M. P. Devereux, (2012), Issues in the Design of Taxes on Corporate Profit, National Tax Journal, National Tax Association, Vol. 65, Issue 3, pp. 709– 730; R. A. de Mooij, (2011), Tax Biases to Debt Finance: Assessing the Problem, Finding Solutions, IMF Staff Discussion Note, SDN11/11 and (2012) in Fiscal Studies, Vol. 33, Issue 4, pp. 489– 512; R. A. de Mooij, M. Keen, and M. Orihara, (2013), Taxation, Bank Leverage and Financial Crises, IMF Working Paper Series, WP/13/48; J. Vella, C. Fuest, and T. Schmidt- Eisenlohr, (2011), The EU Commission’s Proposal for a Financial Transaction Tax, British Tax Review, Vol. 6, pp. 607– 621; J. English, J. Vella, and A. Yevgenyeva, (2013), The Financial Tax Proposal Under the Enhanced Cooperation Procedure: Legal and Practical Considerations, British Tax Review, Vol. 2, pp. 223– 259. Notes 461

83. See in detail: M. P. Devereux, N. Johannesen, and J. Vella, (2013), Can Taxes Tame the Banks? Evidence from European Bank Levies, Working Papers Nr. 1325, Oxford University Centre for Business Taxation. 84. Taxing bank bonuses, bank levies on bank assets over a certain threshold, etc. 85. See also: B. Coulter, C. Mayor, and J. Vickers, (2012), Taxation and Regulation of Banks to Manage Systemic Risk, Oxford University Presentation. 86. G. Cannas et al., (2014), Financial Activities Taxes, Bank Levies and Systemic Risk, EC Taxation Papers Series, Working Paper Nr. 43, who review the different levies introduced. 87. Leaders’ Statement: The Pittsburgh Summit, 2009, Strengthening the International Financial Regulatory System. 88. Underlying those phenomena was obviously the FED’s interest rate policy as an undercurrent determining the course of events. 89. T. Hemmelgarn and G. Nicodème, (2010), The 2008 Financial Crisis and Taxation Policy, Working Paper Nr. 20- 2010. European Commission, Luxembourg; J. Slemrod, (2009), Lessons for Tax Policy in the Great Recession, National Tax Journal, Vol. 62, Issue 3, pp. 387– 397. 90. D. N. Shaviro, (2009), The 2008– 09 Financial Crisis: Implications for Income Tax Reform, New York University Law and Economics Working Paper Nr. 09- 35, New York University, New York. 91. F. Longstaff and I. Strabulaev, (2014), Corporate Taxes and Capital Structure: A Long- Term Historical Perspective, NBER Working Paper, Nr. 20372. 92. Taking into account variables for the costs of financial distress, corporate liquidity, and capital market and macroeconomic conditions. 93. The focus in this section is on income taxation, but note that financial institutions pose challenging problems regarding their exemption in the VAT system as well, such that they invariably receive special treatment that is generally preferential and always non- neutral. 94. D. A. Schackelford, D. N. Shaviro, and J. Slemrod, (2010), Taxation and the Financial Sector, National Tax Journal, Vol. 63, Issue 4, Part 1, pp. 781– 806. They refer to the fact that declining real estate prices would not have created such widespread mortgage default risk had not loan- to- value ratios been so high (p. 784). 95. See in extenso: S. Fatica, T. Hemmelgarn, and G. Nicodème, (2012), The Debt- Equity Tax Bias: Consequences and Solutions, EC Taxation Papers Series, Working Paper Nr. 33, who conclude that tax deductibility of interest payments in most corporate income tax systems coupled with no such measure for equity financing creates economic distortions and exacerbates leverage. Leverage increases with the Corporate Income Tax (CIT) rate. The reason is that the statutory CIT rate determines the value of the debt capital structure of banks. 96. E. D. Kleinbard, (2003), Competitive Convergence in the Financial Services Market. Taxes, Vol. 81, Issue 3, pp. 225– 260. See also S. Langedijk et al., (2014), Debt Bias in Corporate Taxation and the Costs of the Banking Crisis in the EU, EC Taxation Paper Series, Nr. 50 who evidence that eliminating the tax bias could lead to a reduction of public finance losses of around 60– 90% (given a certain level/bandwidth of bank leverage elasticity) caused by the 2008 financial meltdown. The abolition of the preferential treatment is therefore argued as a tool to complement regulatory reform. 97. T. Hemmelgarn and D. Teichmann, (2013), Tax Reforms and Capital Structure of Banks, EC Taxation Papers Series, Working Paper Nr. 37. They conclude that 462 Notes

leverage increases with the CIT rate. The reason is that the statutory CIT rate determines the value of the debt tax shield. A higher tax rate increases incentives to use debt finance when interest payments are deductible from the CIT base. Their results suggest that future tax policies should focus on eliminating the favorable treatment of debt for banks. The reason is that this distortion at least partly undermines the objective of increasing regulatory capital in the financial sector. 98. D. A. Schackelford, D. N. Shaviro, and J. Slemrod, (2010), Taxation and the Financial Sector, National Tax Journal, Vol. 63, Issue 4, Part 1, p. 785. 99. Backward- looking taxes are, however, not the least distortionary way to raise revenue in comparison to an appropriately designed Pigovian tax. 100. E. D. Domar and R. A. Musgrave, (1944), Proportional Income Taxation and Risk- Taking, Quarterly Journal of Economics, Vol. 58, Issue 3, pp. 388– 422. 101. See regarding incentive issues in the FI sector D. A. Schackelford, D. N. Shaviro, and J. Slemrod, (2010), Taxation and the Financial Sector, National Tax Journal, Vol. 63, Issue 4, Part 1, pp. 787– 788. 102. V. V. Acharya and M. Richardson, (2009), Causes of the Financial Crisis, Critical Review, Vol. 21, Issue 2– 3, pp. 195– 210. 103. D. J. Elliott, (2010), Tax Policy and Bank Regulation, Manuscript, Brookings Institution, Washington, DC, unpublished. The first consists of investors with savings that they want to invest in a safe and highly liquid manner, permitting them to withdraw cash whenever they like. The second consists of businesses that want to use this pool of savings to fund investment projects that may be riskier and are more long- term, requiring a relatively illiquid commitment of funds. 104. D. A. Schackelford, D. N. Shaviro, and J. Slemrod, (2010), Taxation and the Financial Sector, National Tax Journal, Vol. 63, Issue 4, Part 1, p. 792. 105. T. Adrian and M. K. Brunnermeier, (2008), CoVaR, Staff Report Nr. 348, Federal Reserve Bank of New York, New York. 106. D. A. Schackelford, D. N. Shaviro, and J. Slemrod, (2010), Taxation and the Financial Sector, National Tax Journal, Vol. 63, Issue 4, Part 1, p. 793. 107. Even if the social harm could be reduced to the fiscal cost of supplying insurance protection, the government would hold a risky position, as the insurer of all financial firms, if their various investment risks (such as from betting against a downturn in real estate prices) were correlated. Thus, even with an actuarially fair fee the insurance fund would have a large positive balance when tail risk was realized less frequently than expected, and would leave the government with financial exposure under the opposite scenario, Ibid. p. 793. 108. D. J. Elliott, (2010), A Primer on Bank Capital, The Brookings Institution, Washington, DC. 109. See in detail D. A. Schackelford, D. N. Shaviro, and J. Slemrod, (2010), Taxation and the Financial Sector, National Tax Journal, Vol. 63, Issue 4, Part 1, pp. 794– 796. They further analyze the recently introduced bank levies given the fundamental objectives they have in common: ‘(1) a desire for retribution or recompense from parties deemed to have caused, and/or profited from, the recent crisis, (2) a desire to align private incentives with the social cost of activities that demonstrably have potentially catastrophic external contagion effects, so as to reduce the likelihood of future crises, and (3) a desire to raise revenue to offset the government fiscal imbalances exacerbated by the cost of dealing with the financial crisis and subsequent recession’ (p. 800). Notes 463

110. If the quantity regulation of an activity that generates a negative externality is set optimally, then any tax set at a rate less than or equal to the marginal social damage will raise revenue, but will not alter behavior from the social optimum. Such a tax is attractive because it raises revenue with no distortion rather than because of its Pigovian incentives. A tax set at a rate in excess of the marginal social damage collects further revenue, but at the cost of moving the equilibrium from the social optimum, with too little of the externality- generating activity. If the quantity regulation is set too laxly, a tax at a rate below the implicit marginal social damage implied by the regulation will raise revenue with no marginal effect, while a tax in excess of that amount (but not greater than the actual marginal social damage) will both raise revenue and affect activity in the right direction. If the quantity regulation is set too strictly, a tax raises revenue without affecting behavior; neither would a subsidy offset the suboptimal level of activity, although it would incur a revenue loss, Ibid. p. 795. 111. T. Matheson, (2010), Taxing Financial Transactions: Issues and Evidence, Working Paper WP/11/54, International Monetary Fund, Washington, DC. 112. T. Hemmelgarn and G. Nicodème, (2010), The 2008 Financial Crisis and Taxation Policy, Working Paper Nr. 20- 2010, European Commission, Luxembourg. 113. In extenso: P. Honohan and S. Yoder, (2010), Financial Transactions Tax: Panacea, Threat, or Damp Squib?, Policy Research Working Paper Series Nr. 5230. Development Research Group, The World Bank, Washington, DC. 114. W. Wagner, (2010), In the Quest of Systemic Externalities: A Review of the Literature, CESifo Economic Studies, Vol. 56, pp. 96– 111. 115. M. Bijlsma, M. Lever, J. Anthony, and G. Zwart, (2011), An Evaluation of the Financial Transaction Tax, CPB Background Paper, p. 6. 116. J. Scheinkman and W. Xiong, (2003), Overconfidence and Speculative Bubbles, Journal of Political Economy, Vol. 111, pp. 1183– 1219. 117. D. P. Porter and V. L. Smith, (2003), Stock Market Bubbles in the Laboratory, The Journal of Behavioral Finance, Vol. 4, Issue 1, pp. 7– 20. 118. Reinhart and Rogoff argue that other tools may do better at preventing real estate bubbles. Banking regulators may for example use capital buffers to reduce excessive lending or set minimum collateral requirements for mortgages. K. Rogoff and C. Reinhart, (2009), This Time is Different: Eight Centuries of Financial Folly, Princeton University Press, Princeton, NJ. 119. M. Bijlsma, M. Lever, J. Anthony, and G. Zwart, (2011), An Evaluation of the Financial Transaction Tax, CPB Background Paper, illustrate: ‘when the acquisition concerns information that will anyway be publicly revealed soon, but speculators can earn a profit by getting their hands on the information early … But even when such information acquisition is in itself socially beneficial (e.g., long- term fundamental information on the security), duplication of collection efforts need not be efficient. A tax on transactions can then efficiently reduce the incentives to invest in those efforts’ (pp. 7– 8). 120. L. H. Summers and V. P. Summers, (1989), When Financial Markets Work Too Well: A Cautious Case for a Securities Transactions Tax, Journal of Financial Services, Vol. 3, pp. 261– 286. It convinced Stiglitz already decades ago to suggest a transactions tax, See: J. E. Stiglitz, (1989), Using Tax Policy to Curb Speculative Short- Term Trading, Journal of Financial Services, Vol. 3, Issue 2 & 3, pp. 101– 113. 121. S. J. Grossman and J. E. Stiglitz, (1980), On the Impossibility of Informationally Efficient Markets, American Economic Review, Vol. 70, Issue 3, pp. 393– 408. 464 Notes

122. The reason is that the willingness of one agent to buy at a price p reveals to other traders that this agent has information that the actual value of the good is higher than p. Other traders then prefer to hold on to the good themselves, and the informed agent cannot benefit from the information advantage. Hence there will be too little investment in information acquisition, M. Bijlsma, M. Lever, J. Anthony, and G. Zwart, (2011), An Evaluation of the Financial Transaction Tax, CPB Background Paper, p. 8. 123. D. Fudenberg and J. Tirole, (1991), Game Theory, MIT Press, Cambridge, section 14.3.3. 124. The noise that these traders introduce into the price formation process allows informed traders to make a trading profit under the cover of the liquidity trades. In addition, models may also explicitly describe the price formation process, for example by including market makers or arbitrageurs who do not possess any information themselves, but who try to disentangle the informed trades from the noise and try to capture some of the profits from that information; see in detail: A. Kyle, (1985), Continuous Auctions and Insider Trading, Econometrica, Vol. 53, Issue 6, pp. 1315– 1335. 125. See for an empirical model: J. Dow and R. Rahi, (2000), Should Speculators Be Taxed?, Journal of Business, Vol. 73, Issue 1, pp. 89– 107. Results seem to imply that taxation reduces the amount of trade on information, making prices less informative. The latter effect is beneficial for speculators: they get higher revenue on their informed trades. Subramanyam compares long- and short- term investors and concludes that ‘that taxes indeed increase the incentives of agents to acquire long- term information over short- term information.’ A. Subrahmanyam, (1998), Transaction Taxes and Financial Market Equilibrium, Journal of Business, Vol. 71, Issue 1, pp. 81– 117. 126. They studied the effect of a tax on uninformed arbitrageurs in a laboratory experiment. Arbitrageurs exploit a market inefficiency, i.e. they buy identical or very similar assets in different markets (often in different time zones) exploit- ing the mispricing between those two markets. These uninformed actors trade with informed traders (speculators) and with liquidity traders (who need to trade for exogenous reasons). They find that when only the arbitrageurs’ trades are taxed, they trade less, and lose less money on their trades. The information content of prices remains unchanged. However, their experiment does not shed light on the incentives of speculators to acquire information, nor does it take into account the effect of taxes on liquidity traders’ presence in the market, R. Bloomfield, M. M. O’Hara and G. Saar, (2009), How Noise Trading Affects Markets: An Experimental Analysis, Review of Financial Studies, Vol. 22, pp. 2275– 2302. (Also M. Bijlsma, M. Lever, J. Anthony, and G. Zwart, (2011), An Evaluation of the Financial Transaction Tax, CPB Background Paper, p. 9) 127. Also known as noise traders: those who are buying or selling securities for a variety of unpredictable reasons rather than reasons based on informed decision- making. 128. Function- specific payments, industry- specific payments, and more advanced models that are based on derivative ‘contract for difference techniques’. 129. D. A. Schackelford, D. N. Shaviro, and J. Slemrod, (2010), Taxation and the Financial Sector, National Tax Journal, Vol. 63, Issue 4, Part 1, p. 798. 130. Ibid. pp. 798– 799. 131. S. Claessens, M. Keen, and C. Pazarbasioglu, (2010), Financial Sector Taxation, The IMFs Report to the G20 and Background Material, Washington, Washington, DC. Notes 465

132. E. D. Kleinbard and T. Edgar, (2010), The Financial Sector and the Crisis: Was Tax the Problem? Is It the Solution? Slides presented at a workshop on ‘Rethinking the Taxation of the Financial Sector in Light of the Recent Crisis,’ February 5. 133. This argument addresses the fact that a tax on pure profits or rents in any sector has desirable efficiency properties, but in practice it is difficult to separate pure profits or rents from the normal return to capital, and so designing a non- distorting tax is difficult. If one can assert that most of the observed return in a given sector is rent or pure profit, then the potential distorting effect per dollar raised is arguably low, D. A. Schackelford, D. N. Shaviro, and J. Slemrod, (2010), Taxation and the Financial Sector, National Tax Journal, Vol. 63, Issue 4, Part 1, p. 799, footnote 17. 134. Such a tax would reduce risk- taking only given that the tax treatment of losses is punitively asymmetric. Otherwise, a tax on profits might induce decision makers to increase pre- tax risk positions in order to restore the after- tax positions they had in absence of the tax. Note also that ex post increases in the generosity of the tax treatment of losses is a form of taxpayer bailout, Ibid. p. 800, footnote 18. 135. Using country differences on double taxation in multinational banks, they show that (1) a large fraction (85%) of such taxes are reflected in prices, and (2) banks adjust their behavior (activities in different countries) to a large extent in response to such tax differences. Huizinga et al. claim that also FAT may suffer from such pass- through rates, and recommend that any such taxes are harmonized across the EU, and across different parts of the financial sector; see H. Huizinga, J. Voget, and W. Wagner, (2011), International Taxation and Cross- Border Banking, European Banking Center, Discussion paper, Nr. 2011- 015. 136. International Monetary Fund, (2010), A Fair and Substantial Contribution by the Financial Sector, Interim Report for the G- 20, International Monetary Fund, Washington, DC, p. 26. 137. See also: D. Schoenmaker and S. Oosterloo, (2005), Financial Supervision in an Integrating Europe: Measuring Cross- Border Externalities, International Finance, Vol. 8, Issue 1, pp. 1– 27. 138. See for example: A. R. Admati, (2000), Forcing Firms to Talk: Financial Disclosure Regulation and Externalities, Review of Financial Studies, Vol. 13, Issue 3, pp. 479– 519. 139. For extensive discussions of the concept of systemic risk and comprehensive literature see O. de Bandt and P. Hartmann, (2000), Systemic Risk: A Survey, ECB Working Paper Series, Nr. 35, and O. de Bandt, P. Hartmann, and J. Peydró, (2009), Systemic Risk in Banking: An Update, ECB Working Paper Series and in A. Berger, P. Molyneux and J. Wilson (eds.), (2012), Oxford Handbook of Banking, Oxford University Press, Oxford. 140. P. Hartmann, (2009), Systemic Risk, ECB Financial Stability Review, December, pp. 134– 142. 141. See: E. Cerutti, S. Claessens, and P. McGuire, (2012), Systemic Risk in Global Banking: What Can Available Data Tell Us and What More Data are Needed, BIS Working Papers, Nr. 376. 142. See F. Fecht, H. P. Grüner, and P. Hartmann, (2012), Financial Integration, Specialization and Systemic Risk, ECB Working Paper Series, Nr. 1425. 143. F. Allen and D. Gale, (2000), Financial Contagion, Journal of Political Economy, Vol. 108, Issue 1, pp. 1– 33; X. Freixas, B. Parigi, and J. C. Rochet, (2000), Systemic Risk, Interbank Relations and Liquidity Provision by the Central Bank, Journal of Money, Credit and Banking, Vol. 32, Issue 3, pp. 631– 638. 466 Notes

144. H. Minsky described how in good times consumption and investment increase generates income, which fuels the financing of more consumption and investment, but also the neglect of increasing risks. Even small events can then lead to a re- pricing of risk and an endogenous unraveling of the credit boom, which then adversely affects many intermediaries and markets at the same time; see H. Minsky, (1977), A Theory of Systemic Fragility, in E. Altman and A. Sametz (eds.), Financial Crises: Institutions and Markets in a Fragile Environment, Wiley & Sons, Hoboken, pp. 138– 152; C. Kindleberger, (1978), Manias, Crashes and Panics: A History of Financial Crises, Macmillan, Basingstoke. 145. G. Gorton, (1988), Banking Panics and Business Cycles, Oxford Economic Papers. 146. The vulnerability of financial markets is caused by (1) the information intensity and intertemporal nature of financial contracts, (2) the balance sheet structures of financial intermediaries (often exhibiting high leverage and maturity mismatches), and (3) the high degree of interconnectedness of wholesale financial activities; P. Hartmann, (2009), Systemic Risk, ECB Financial Stability Review, p. 135. 147. Financial systems allocate funds from agents who have them, but possess no specific knowledge about promising investment opportunities, to agents who have knowledge about the opportunities, but not the funds to engage in them. This creates an agency problem between the two parties, which may be handled more or less well through the underlying financial contracts. If contracts are incomplete and negative news arrives on some of the investment projects, but information asymmetries do not allow lenders to judge whether this also affects other investment projects, funding may evaporate for all projects alike, Ibid. Hartmann. 148. J. Trichet, (2009), Systemic Risk, Clare Distinguished Lecture in Economics and Public Policy, University of Cambridge, December 10. 149. ‘Bad news’ about an FI, or even its failure, or the crash of a financial market leads to considerable adverse effects on one or several other FIs or markets, e.g. their failure or crash. The essential feature is the ‘domino effect’ from one institution to the other and from one market to the other. 150. It includes not only the events described above but also severe and widespread (‘systemic’) shocks which adversely affect a large number of FIs or markets at the same time. 151. O. de Bandt and P. Hartmann, (2010), What is Systemic Risk Today?, Working Paper, p. 5. 152. See Ibid. p. 5, for a full overview of the different categories. 153. P. Hartmann, (2009), Systemic Risk, ECB Financial Stability Review, p. 135. 154. See also for a number of different hypothesis: C.- P. Georg, (2014), Contagious Herding and Endogenous Network Formation in Financial Networks, ECB Working Paper, Nr. 1700. 155. K. Anand, B. Craig, and G. von Peter, (2014), Filling in the Blanks: Network Structure and Interbank Contagion, BIS Working Paper, Nr. 455. 156. See in detail: K. Kim and S. Mitra, (2014), Real and Financial Vulnerabilities from Cross- Border Banking Linkages, IMF Working Paper, Nr. WP/14/136. 157. The most recent version: Bank for International Settlements (BIS), (2013), Global Systemically Important Banks. Updated Assessment Methodology and the Higher Loss Absorbency Requirements. See for a scorecard analysis for the year 2013: BIS, (2014), The G- SIB Assessment Methodology- Score Calculation, (November 2014). 158. BIS, (2012), A Framework for Dealing with Domestically Important Banks, Basel. Notes 467

159. International Association of Insurers, (2013), Global Systemically Important Insurers: Initial Assessment Methodology. For an overview of the challenges in the insurance sector see: J. Adams, (2014), Global Systemically Important Insurers: Issues, Policies and Challenges After Designation, Speech Bank of England, March 24, 2014. 160. FSB, (2014), Assessment Methodologies for Identifying Non- Bank Non- Insurer Global Systemically Important Financial Institutions, Consultation Document. 161. See for the most recent version: S. M. Markose, (2013), Systemic Risk Analytics: A Data- Driven Multi-Agent Financial Network Approach, Journal of Banking Regulation, Vol. 14, Issue 3/4, pp. 285– 305, Special Issue on Regulatory Data and Systemic Risk Analytics. 162. S. M. Markose, (2012), Systemic Risk from Global Financial Derivatives: A Network Analysis of Contagion and its Mitigation with Super- Spreader Tax, IMF Working Paper, WP/12/282. Based on 2009 FDIC and individually collected firm level data covering gross notional, gross positive (negative) fair value, and the netted derivatives assets and liabilities for 202 financial firms which includes 20 SIFIs, the bilateral flows are empirically calibrated to reflect data- based constraints. This produces a tiered network with a distinct highly clustered central core of 12 SIFIs that account for 78% of all bilateral exposures and a large number of financial intermediaries on the periphery. The topology of the network results in the ‘ Too- Interconnected- To- Fail’ (TITF) phenomenon in that the failure of any member of the central tier will bring down other members with the contagion coming to an abrupt end with demise of the ‘ super- spreaders’. 163. In the wake of Markose, Arsov et al. have developed a systemic financial stress index measuring the tail risk in the financial industry; see: I. Arsov, E. Canetti, L. Kodres, and S. Mitra, (2013), ‘Near- Coincident’ Indicators of Systemic Stress, IMF Working Paper Series, WP/13/115. 164. S. Markose, S. Giansante, M. Gatkowski, and A. R. Shanghaghi, (2010), Too Interconnected To Fail: Financial Contagion and Systemic Risk in Network Model of CDS and Other Credit Enhancement Obligations of US Banks, Original Essex University Working Paper Series, Nr. 683 which was later on updated; see: S. Markose, S. Giansante, and A. Shaghaghi (2012), Too Interconnected To Fail Financial Network of U.S. CDS Market: Topological Fragility and Systemic Risk, Journal of Economic Behavior and Organization, Vol. 83, Issue 3, August 2012, pp. 627– 646. 165. S. Markose, B. Oluwasegun, and S. Giansante, (2012), Multi- Agent Financial Network (MAFN) Model of US Collateralized Debt Obligations (CDO): Regulatory Capital Arbitrage, Negative CDS Carry Trade and Systemic Risk Analysis, Chapter in Simulation in Computational Finance and Economics: Tools and Emerging Applications Alexandrova- Kabadjova B., S. Martinez- Jaramillo, A. L. Garcia- Almanza, and E. Tsang, (eds.), (2012), IGI Global, August 2012. 166. The FSB developed such a list in 2010: See FSB, (2010), Reducing the Moral Hazard by Systemically Important Financial Institutions, FSB Recommendations and Time Lines. 167. S. Markose, (2012), Systemic Risk from Global Financial Derivatives: A Network Analysis of Contagion and Its Mitigation with Super- Spreader Tax, International Monetary Fund Working Paper Nr. 12/282. 168. An eigen- pair is the mathematical pair of an eigenvector and its associated eigenvalue. The eigenvalue is a special set of scalars associated with a linear system of equations (i.e. a matrix equation) which in math is often used as a technique to 468 Notes

measure the stability of a certain proposition. The eigenvector- centrality (EVC) measures the nature and intensity of the relatedness of nodes in a network. It is applied in math or physics but also in social science. In this context it measures the nature and magnitude (what transactions, what volumes, what type of risks, how often these transactions change or expire) of the relationship of an FI with other FIs in the interconnected financial industry. Eigenvector centrality is one of the methods for computing the ‘centrality’, or approximate importance, of each node in a graph. The assumption is that each node’s centrality is the sum of the centrality values of the nodes that it is connected to. The nodes are drawn with a radius proportional to their centrality. 169. A. Haldane, (2009), Why Banks Failed the Stress Test, In Speech given at the Marcus- Evans Conference on Stress Testing, Bank of England (February). 170. The parallel with the Pigovian application in environmental situations is clear. Also in that context an indicator signaling externalities with system- wide ecological ramifications is absent. 171. A. Haldane, (2009) Rethinking the Financial Network, Speech Delivered at the Financial Student Association, Amsterdam; J. D. Hamilton, (1989), A New Approach to the Economic Analysis of Non Stationary Time Series and Business Cycle, Econometrica, Vol. 57, Issue 2, pp. 357– 384. 172. Section 7004 of the ‘Tax Reform Act of 2014’ would impose a quarterly excise tax of 0.035% on systemically important financial institutions (SIFIs). The excise tax would be applied to a SIFI’s total consolidated assets in excess of $500 billion. For the purposes of the legislation, a SIFI would be any bank holding company with at least $50 billion in total consolidated assets, or any nonbank financial institution designated for SIFI treatment by the Financial Stability Oversight Council and subject to oversight by the Federal Reserve Board. The $500 billion threshold would be indexed for increases in the gross domestic product (GDP) after calendar year 2015. 173. See: Committee on Ways and Means, (2014), Tax Reform Act 2014, Chairman Dave Camp, Section- by- Section Summary, pp. 180– 181. 174. The Greens, (2014), Implicit Subsidies in the EU Banking Sector, Intermediate Reporting (January). 175. See also: S. Schich and S. Lindh, (2012), Implicit Guarantees for Bank Debt: Where Do We Stand?, OECD Journal, Financial Market Trends, Vol. 2012, Issue 1, pp. 1– 22. 176. See for a full overview of all models: S. Markose and S. Giansante, (2014), Pigou Tax of Systemically Important Financial Intermediaries (SIFIs) in Financial Networks: An Empirical Application of Systemic Risk Monitoring and Governance, Working Paper. 177. H. Minski, (1982), The Financial- Instability Hypothesis: Capitalist Processes and the Behavior of the Economy, in Ch. P. Kindleberger and J- P. Laffargue (eds.), Financial Crises: Theory, History and Policy, Cambridge University Press, Cambridge, pp. 13– 38. 178. S. Markose and S. Giansante, (2014), Pigou Tax of Systemically Important Financial Intermediaries (SIFIs) in Financial Networks: An Empirical Application of Systemic Risk Monitoring and Governance, Working Paper, Ibid. p. 5. 179. See Ibid. Section 3, pp. 20– 23. 180. C. H. Furfine, (2003), Interbank Exposures: Quantifying the Risk of Contagion, Journal of Money, Credit and Banking, Vol. 35, Issue 1, pp. 111– 128. Furfine developed the framework for quantifying contagion risk and the domino effect Notes 469

it creates. See S. Markose and S. Giansante, (2014), Pigou Tax of Systemically Important Financial Intermediaries (SIFIs) in Financial Networks: An Empirical Application of Systemic Risk Monitoring and Governance, Working Paper, pp. 24– 27. 181. Section 6.6.2.3. 182. Lehman Brothers’ capital ratios did meet all the Basel criteria on the last working days before it failed on Sunday, given the lack of government support or backstop. 183. V. V. Acharya, L. H. Pedersen, T. Philippon, and M. Richardson, (2009), Measuring Systemic Risk, Working Paper, New York University Stern School of Business; V. V. Acharya, L. H. Pedersen, T. Philippon, and M. Richardson (2009) Regulating Systemic Risk, Chapter 13 in Restoring Financial Stability: How to Repair a Failed System, V. V. Acharya and M. Richardson (eds.), New York University Stern School of Business, John Wiley and Sons, Hoboken; V. V. Acharya, L. H. Pederson, T. Philippon, and M. Richardson, (2010), A Tax on Systemic Risk, Working Paper. V. V. Acharya, (2009), A Theory of Systemic Risk and Design of Prudential Bank Regulation, Journal of Financial Stability Elsevier, Vol. 5, Issue 3, pp. 224– 255. 184. V. V. Acharya, C. Brownelees, R. Engle, F. Farazmand, and M. Richardson, (2010), Measuring Systemic Risk, Chapter four in Regulating Wall Street: The Dodd- Frank Act and the New Architecture of Global Finance, V. V. Acharya, T. Cooley, M. Richardson, and I. Walter (eds.), John Wiley & Sons, Hoboken, pp. 199– 232. In a European context regarding this model see: V. V. Acharya and S. Steffen, (2012), Analyzing Systemic Risk in the Banking Sector, Working Paper. See also: B. Weder di Mauro, (2010), Taxing Systemic Risk: Proposal for a Systemic Risk Levy and a Systemic Risk Fund, University of Mainz Working Paper. 185. C. Brownlees and R. Engle, (2011), Volatility, Correlation and Tails for Systemic Risk Measurement, Working Paper Series, Department of Finance, NYU advanced the model. Idier et al., however, conclude that standard balance- sheet metrics like the tier one solvency ratio are better able than the MES to predict equity losses conditionally to a true crisis (using the 2008 datatsets); See: J. Idier, G. Lamé, and J.- S. Méssonier, (2013), How Useful is the Marginal Expected Shortfall for the Measurement of Systemic Exposure, A Practical Assessment, ECB Working Paper Series, Nr. 1546. 186. I will limit myself to referring to other models developed in so far as they are not mentioned in the main text. They have contributed one way or the other to the understanding of the occurrence of systemic risk, but have, as insight has pro- gressed, become known for adding particular features or a specific understanding rather than a continued validation of their overall model. They include:

• Conditional VaR (CoVaR): T. Adrian and M. K. Brunnermeier, (2011), CoVaR, Federal Reserve Bank of New York Staff Reports, No. 348, original [2009]. The value at risk (VaR) of financial institutions conditional on other institutions being in distress (using six risk factors). The increase of CoVaR relative to VaR measures spillover risk among institutions. They also created a network CoVaR which makes the model resemble Markose’s model, but still based on market data. • Distance to Distress (DD): O. Castren and I. K. Kavonius, (2009), Balance Sheet Interlinkages and Macro- Financial Risk Analysis in the Euro Area, ECB Working Paper, Nr. 1124. 470 Notes

• Distress Insurance Premium (DIP): X. Huang, H. Zhou, and H. Zhu, (2010), Systemic Risk Contribution, BIS Working Paper, Nr. 60- 3. • POD (Probability that at least one bank becomes distressed): M. Segoviano and C. Goodhart, (2009), Banking Stability Measures, IMF Working Paper Series, Nr. WP/09/04. • For an extensive combined review of these models see: D. Bisias, M. Flood, A. Lo, and S. Valavanis, (2012), A Survey of Systemic Risk Analytics, Office of Financial Research Working Paper, Nr. 0001.

187. See for a comparison of the different models suggested: John Sedunov III, (2013), What is the Systemic Risk Exposure of FIs?, Midwest Finance Association 2013 Annual Meeting Paper. See also J.- P. Fouque and J. A. Angsam, (2013), Handbook on Systemic Risk, Cambridge University Press, Cambridge. 188. J. P. Solorzano- Margain, S. Martinez- Jaramillo, and F. Lopez- Gallo, (2013), Financial Contagion: Extending the Exposures Network of the Mexican Financial System, Computational Management Science, Vol. 10, Issue 2– 3, pp. 125– 155. 189. A similar non- EVC model was recently used to visualize the Dutch Overnight Money Market; See: R. Heijmans, R. Heuver, C. Levallois, and I. van Lelyveld, (2014), Dynamic Visualisation of Large Transaction Networks: The Daily Dutch Overnight Money Market, DNB Working Paper Series, Nr. 418. 190. S. Markose, (2013), Systemic Risk Analytics: A Data Driven Multi- Agent Financial Network (MAFN) Approach, Submitted Special Issue Journal of Banking Regulation: Future of Regulatory Data and Systemic Risk Analytics, Bank of England Workshop January 17– 18, 2013. 191. Markose and S. Giansante, (2014), Pigou Tax of Systemically Important Financial Intermediaries (SIFIs) in Financial Networks: An Empirical Application of Systemic Risk Monitoring and Governance, Working Paper, p. 29. 192. See for an attempt of an integrated approach in this matter: A. Serguaiva, (2013), Systemic Risk Identification, Modelling, Analysis, and Monitoring: An Integrated Approach, University College London, Working Paper. 193. See in detail: M. Bijlsma, J. Klomp, and S. Duineveld (CPB), (2010), Systemic Risk in the Financial Sector: A Review and Synthesis, CBP Documents Nr. 210, pp. 53– 70. For the impact on the most adequate form of supervision see: T. Beck and W. Wagner, (2013), Supranational Regulation: How Much and From Whom?, CEPR Discussion Paper Nr. DP9546. 194. See S. G. Cechetti, (2014), Systemic Risk and the Solvency- Liquidity Nexus of Banks, Brandeis International Business School Presentation, April 25. 195. C. W. Calomiris and S. H. Haber, (2013), Fragile By Design: The Political Origin of Banking Crisis and Scarce Credit, Princeton University Press, Princeton, NJ. 196. See BIS, (2011), Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems, supra. 197. Contingent Convertible (CoCo) bonds and other products with refined covenants are put in place to serve that purpose. 198. See for a recent update of the different models currently in vogue: A. Lucas, B. Schwaab, and X. Zhang, (2013), Measuring Credit Risk in a Large Banking System: Econometric Modeling and Empirics, Presentation Cleveland FED, May 30– 31 also as paper: Tinbergen Institute Discussion Paper 13- 063/IV/DSF56. 199. See BIS, (2011), Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems, supra. Notes 471

200. See: S. Krieger, (2011), Shadow Maturity Transformation and Systemic Risk, FED of New York Presentation, March 6. 201. At least that is the conventional wisdom. This holds that banks benefit from a steep yield curve because they intermediate funds across maturities by borrowing ‘short’ and lending ‘long’. However, a steepening of the yield curve caused by rising long- term interest rates will also result in immediate capital losses on longer- term assets, which may offset part of any benefits of higher net interest margins. The share prices of banks that engage more heavily in maturity transformation have a significantly less negative reaction to an unanticipated steepening of the yield curve, a result that partially confirms the conventional wisdom that banks benefit from a steeper yield curve due to their role as maturity transformers. More recently, it was also demonstrated that bank stocks respond significantly to exogenous fluctuations in interest rates induced by monetary policy announcements. Bank stock prices decline substantially following an unanticipated increase in the level of interest rates or a steepening of the yield curve. A large maturity gap, however, significantly attenuates the negative reaction of returns to a slope surprise, a result consistent with the role of banks as maturity transformers. The share prices of banks that rely heavily on core deposits decline more in response to policy- induced interest rate sur- prises, a reaction that primarily reflects ensuing deposit disintermediation: See W. B. English, S. J. Van den Heuvel, and E. Zakrajšek, (2014), Interest Rate Risk and Bank Equity Valuations, University of Pennsylvania (Wharton), Working Paper. 202. Together with the interbanking market, the asset- backed commercial paper market (ABCP) and the tri- party repo market. The latter two categories are part of the shadow banking market (Section 6.7). 203. It also explains most of the suggested changes regarding MMFs, Proposal for a Regulation of the European Parliament and of the Council on Money Market Funds (Com/2013/0615 final – 2013/0306 (COD) of September 3, 2013. 204. See M. M. Andreasen, M. Ferman, and P. Zabczyk, (2012), The Business Cycle Implications of Bank’s Maturity Transformation, ECB Working Paper Series, Nr. 1489. 205. See in detail: O. Entrop, C. Memmel, B. Ruprecht, and M. Wilkens, (2012), Determinants of Bank Interest Margins: Impact of Maturity Transformation, Deutsche Bundesbank Discussion Paper Nr. 17/2012; C. Memmel, (2010), Bank’s Exposure to Interest Rate Risk, Their Earnings from Term Transformation, and the Dynamics of the Term Structure, Deutsche Bundesbank, Banking and Financial Studies Series, Nr. 7/2010. 206. See: A. Penalver, (2013), Managing Maturity Transformation Under Aggregate Uncertainty, Work in Progress, Paris School of Economics Working Paper. 207. Which is then often offset by interest- rate derivatives offered by those same banks. See: T. Paligorova and J. A. C. Santos, (2014), Rollover Risk and the Maturity Transformation Function of Banks, Bank of Canada Working Paper Series, Nr. 2014- 8. 208. A. Segura and J. Suarez, (2012), Dynamic Maturity Transformation, CEMFI Working Paper Nr. 1105 and (2013), Recursive Maturity Transformation, CEMFI Working Paper. For a quantification of the issue see: A. Segura et al., (2014), How Excessive is Bank’s Maturity Transformation, CEMFI Working Paper. 209. L. de Haan and J. W. van den End, (2012), Bank Liquidity, the Maturity Ladder, and Regulation, Presentation DNB. 472 Notes

210. N. Tasic´ and N. Valev, (2009), The Maturity Structure of Bank Credit: Determinants ad Effects on Economic Growth, Working Paper. 211. Within the context of the EU observations are in line with the theory highlighted: these banks transform short- term customer deposits and one- to five- year hybrid and subordinated debt liabilities into loan assets with greater than five years’ maturity. The value- weighted average maturity of the assets of these banks exceeds their liabilities by 2.07 years, with standard deviation 1.44 years; see in detail: G. Sher and G. Loiacono, (2013), Maturity Transformation and Interest Rate Risk in Large European Bank Loan Portfolios, Working Paper. 212. In fact it was demonstrated that through facilitating maturity transformation, the lender of last resort gives banks an incentive to lever, diversify, and lower their lending standards. Bank leverage increases shareholder value because maturity transformation effectively allows banks to borrow against lower interest rates than their shareholders. When the gains from maturity transformation are passed on to bank customers, lending standards deteriorate. This risk- taking intensifies when the term spread is steeper, and is thus procyclically related to the stance of the macroeconomy; See: M. Mink, (2011), Procyclical Bank Risk- Taking and the Lender of Last Resort, DNB Working Paper Series, Nr. 301. 213. B. Winters, (2012), Review of the Bank of England’s Framework for Providing Liquidity to the Banking Sector, Bank of England Reporting, pp. 79– 83. 214. R. S. Rajan and G. Bird, (2001), Banks, Maturity Mismatches and Liquidity Crises: A Simple Model, CIES Working Paper, Nr. 0132. 215. Just like asset bubbles can also occur under constant monetary supply. 216. For an exception to that: H. Scholz, S. K. H. Simon, and M. Wilkens, (2007), Maturity Transformation Strategies and Interest Rate Risk of Financial Institutions: Evidence from the German Market, Working Paper. 217. I. J. M. Arnold and S. E. van Ewijk, (2014), The Impact of Sovereign and Credit Risk on Interest Rate Convergence in the Euro Area, DNB Working Paper Series, Nr. 425; See also: C. Roulet, (2011), Empirical Essays on Bank Liquidity Creation and Maturity Transformation Risk, Dissertation, Université de Limoge, Economics Department, in particular pp. 21– 49. 218. In which the FI has to hold in cash only a fraction of the deposits submitted at the bank. Central liquidity can close the gap except in the event of a run, during which the liquidity lines are not sufficient. However, requiring the banks to hold equal amounts of cash relative to deposits would starve the real economy of credit and would make credit yield spike and materially increase the cost of funding. 219. A. D. Smith, (2009), How To Make a Run- Proof Bank, Achieving Maturity Transformation Without Fractional Reserves, Griffith University Working Paper; C. Rossi, (2012), Is Maturity Transformation the Devil’s Work or just Bedeviled, Presentation, Atlanta FED, April 12. 220. B. Ruprecht, O. Entrop, T. Kick, and M. Wilkens, (2013), Market Timing, Maturity Mismatch and Risk Management: Evidence from the Banking Industry, Working Paper. 221. G. de Niccolò, A. Gamba ad M. Lucchetta, (2012), Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking, Presentation, Cleveland FED, April 13. 222. M. K. Brunnermeier and M. Oehmke, (2013), Predatory Short Selling, Princeton University Working Paper, who demonstrate that financial institutions may be vulnerable to predatory short selling. When the stock of a financial institution Notes 473

is shorted aggressively, leverage constraints imposed by short- term creditors can force the institution to liquidate long- term investments at fire sale prices. 223. M. K. Brunnermeier and M. Oehmke, (2010), The Maturity Rat Race, Journal of Finance, American Finance Association, Vol. 68, Issue 2, pp. 483– 521. Individual creditors can have an incentive to shorten the maturity of their own loans to the institution, allowing them to adjust their financing terms or pull out before other creditors can. This, in turn, causes all other lenders to shorten their maturity as well, leading to excessively short- term financing. This rat race occurs when interim information is mostly about the probability of default rather than the recovery in default, and is most pronounced during volatile periods and crises. 224. D. Luttrell, H. Rosenblum, and J. Thies, (2012), Understanding the Risks Inherent in Shadow Banking, a Primer and Practical Lessons Learned, Staff Paper, Dallas FED. 225. J. C.- F. Kuong, (2013), Self- Fulfilling Fire- Sales. Fragility of Collateralized Short- Term Debt Markets, London School of Economic Working Paper. This paper shows that collateralized lending, although optimal to reduce borrower moral hazard, can lead to multiple equilibria and endogenous aggregate risk. This is because of a feedback loop between the risk- taking behavior of borrowers and the expected price of seized collateral in the secondary market. When the fire sale price of collateral is expected to be low, lenders demand more collateral and higher debt yields, making it more attractive for borrowers to engage in risk- taking ex ante (due to limited liability). The riskier pool of projects will lead to more liquidation ex post and hence more seized collateral to be sold off, justify- ing the expectation of low fire sale prices. 226. M. Singh and J. Aitkin, (2010), The (Sizeable) Role of Rehypothecation in the Shadow Banking System, IMF Working Paper, WP/10/172. 227. Rehypothecation can in general be described by the practice by banks and brokers of using, for their own purposes, assets that have been posted as collateral by their clients. Often the client will be compensated through a lower borrowing fee or rebate of costs incurred. There are various technical variations in rehypothecation; see in detail Section 6.7. 228. See L. M. Sweet, (2010), Central Counterparties: Understanding Risks and Risk Transformation, Presentation, NY FED, October 21. 229. V. Maurin, (2014), Re- Using the Collateral of Others: A General Equilibrium Model of Rehypothecation, European University Institute Working Paper; M. Katagiri, R. Kato and T. Tsuruga, (2013), Prudential Capital Controls or Bailouts: The Impact of Different Collateral Constraints Assumptions, Kobe University Working Paper. 230. See for an ex ante identification/quantification model: B. Jones, (2014), Identifying Speculative Bubbles: A Two- Pillar Surveillance Framework, IMF Working Paper Series, Nr. WP/14/208. 231. The FSB acknowledges that by pointing consistently in their shadow banking reporting to the need for better and more consistent measurement tools and the complexities it brings for international cooperation, as shadow banking systems in different countries have very different characteristics; see for a comprehensive overview: L. Nijs, (2016), The Handbook on Global Shadow Banking, Wiley & Sons, Surrey, forthcoming. 232. A. Admati and M. Hellwig, (2013), The Bankers New Clothes, Princeton University Press, Princeton, NJ, pp. 81– 100 and pp. 148– 167. 474 Notes

233. O. Issing, J. P. Krahnen, K. Regling, and W. White, (2012), White Paper, Recommendations by the Issing- Commission, Goethe University Frankfurt, p. 10. 234. M. King, (1985), A Pigouvian Rule for the Optimal Provision of Public Goods, NBER Working Paper, Nr. 1681; A.Tsuneki, (2002), Shadow- Pricing Interpretation of the Pigovian Rule for the Optimal Provision of Public Goods: A Note, International Tax and Public Finance, Vol. 9, Issue 1, pp. 93– 104. 235. A. Levels and J. Capel, (2012), Is Collateral Becoming Scarce: Evidence from the Eurozone, DNB Occasional Studies, Vol. 10, Issue 1, pp. 1– 74. 236. Liquidity shocks can have many different sources and its magnitude is dependent on many exogeneous and endogenous factors from an FI’s point of view; see in detail: P. D. Karam et al., (2014), The Transmission of Liquidity Shocks: The Role of Internal Capital Markets and Bank Funding Strategies, IMF Working Paper, Nr. WP/14/207. 237. See for the different types of liquidity exposure and liquidity concepts: K. Nikolau, (2009), Liquidity (Risk) Concepts. Definitions and Interactions, ECB Working Paper Series, Nr. 1008. 238. BIS, (2014), Liquidity Coverage Ratio Disclosure Standards and BIS, (2014), Guidance for Supervisors on Market-Based Indicators of Liquidity. 239. See for a technical analysis: J. W. van den End and M. Kruidhof, (2012), Modelling the Liquidity Ratio as Macroprudential Instrument, DNB Working Paper Series, Nr. 342; D. C. Hardy and Ph. Hochreiter, (2014), A Simple Macroprudential Liquidity Buffer, IMF Working Paper, Nr. WP/14/235. 240. Haircut, which can have different meanings, can be defined here as the percentage by which an asset’s market value is reduced for the purpose of calculating capital requirement, margin, and collateral levels; see BIS, (2013), Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools, bis.org, pp. 13– 15. 241. BIS, (2008), Principles for Sound Liquidity Risk Management and Supervision, bis.org. 242. D. Diamond and P. Dybvig, (1983), Bank Runs, Deposit Insurance, and Liquidity, Journal of Political Economy, Vol. 91, pp. 401– 419. 243. M. Brunnermeier, (2009), Deciphering the Liquidity and Credit Crunch 2007– 2008, Journal of Economic Perspectives, Vol. 23, pp. 77– 100. F. Allen, A. Babus, and E. Carletti, (2010), Financial Connections and Systemic Risk, NBER Working Paper, Vr. 16177. 244. E. Perotti and J. Suarez, (2009), Liquidity Insurance for Systemic Crises, CEPR Policy Insight 31, February. Overnight (repo) secured credit feeding the final stage of the securitization wave grew explosively during 2002– 2007 to a volume over $10 trillion. Rapid withdrawals forced an unprecedented liquidity support by central banks, undermining their control over the money supply. The need to contain the future accumulation of liquidity is thus a core challenge for macroprudential policy; see G. Gorton, (2009), Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007, paper prepared for the Federal Reserve Bank of Atlanta’s 2009 Financial Markets Conference, May. 245. E. Perotti and J. Suarez, (2011), A Pigovian Approach to Liquidity Regulation, CEPR Discussion Paper, Nr. 8271, March. The paper has been re- issued and updated on a number of occasions; see E. Perotti and J. Suarez, (2011), A Pigouvian Approach to Liquidity Regulation, IMF, Paper presented at the 12th Jacques Polak Annual Research Conference, November 10– 11; E. Perotti and J. Suarez, (2011), A Pigovian Approach to Liquidity Regulation, DNB Working Notes 475

Papers nr. 291, Netherlands Central Bank, Research Department; E. Perotti and J. Suarez, (2011), A Pigovian Approach to Liquidity Regulation,Tinbergen Institute Discussion Papers 11- 040/2/DSF15, Tinbergen Institute and ultimately published: E. Perotti and J. Suarez, (2011), A Pigovian Approach to Liquidity Regulation, International Journal of Central Banking, Vol. 7, Issue 4, pp. 3– 41. See for earlier work: E. Perotti and J. Suarez, (2010), Liquidity Risk Charges as a Macro- Prudential Tool, DSF Policy Paper Series, Nr. 1. 246. M. L. Weitzman, (1974), Prices vs. Quantities, Review of Economic Studies, Vol. 41, pp. 477– 491. The method used is linked to the discussion started by Poole (1970): that methodology concerned the optimality of price or quantity monetary policy instruments when the system is exposed to a variety of negative or idiosyncratic shocks; see W. Poole, (1970), Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model, Quarterly Journal of Economics, Vol. 84, pp. 197– 216. 247. E. Perotti and J. Suarez, (2002), Last Bank Standing: What Do I Gain if You Fail, CEMFI Working Paper. 248. Net stable funding ratios (also part of the Basel III package) impose an upper threshold on short- term debt that reduces overall liquidity risk, but ‘redistributes liquidity risk inefficiently across banks’. Banks with better credit opportunities will be constrained by this, ‘while the reduced systemic risk actually encourages banks with low credit ability to expand their loan book’: see: E. Perotti and J. Suarez, (2011), A Pigovian Approach to Liquidity Regulation, CEPR Discussion Paper, Nr. 8271, March, p. 3. 249. See also: G. Lopez- Espinosa, A. Moreno, A. Rubia, and L. Valderrama, (2012), Short- Term Wholesale Funding and Systemic Risk, A Global CoVaR Approach, IMF Working Paper, WP/12/46; G. Lopez- Espinosa, A. Moreno, A. Rubia, and L. Valderrama, (2012), Systemic Risk and Asymmetric Responses in the Financial Industry, IMF Working Paper Series, WP/12/152. 250. E. Perotti and J. Suarez, (2011), A Pigovian Approach to Liquidity Regulation, CEPR Discussion Paper, Nr. 8271, March, p. 4. 251. The going concern value of an FI as reflected in the share price. 252. E. Perotti and J. Suarez, (2011), A Pigovian Approach to Liquidity Regulation, CEPR Discussion Paper, Nr. 8271, March, p.1. See also: M. C. Keeley, (1980), Deposit Insurance, Risk, and market Power in Banking, American Economic Review, Vol. 80, Issue 5, pp. 1183– 1200; D. Gale, (2010), Capital Regulation and Risk- Taking, International Journal for Central Banking, Vol. 6, Issue 4, pp. 187– 204. 253. T. Hellmann, K. Murdock, and J. Stiglitz, (2000), Liberalisation, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?, American Economic Review, Vol. 90, pp. 147– 165. 254. E. Perotti and J. Suarez, (2011), A Pigovian Approach to Liquidity Regulation, CEPR Discussion Paper, Nr. 8271, March. 255. Ibid. 256. G. Gianfelice, G. Marotta, and C. Torricelli, (2013), A Liquidity Risk Index as a Regulatory Tool for Systemically Important Banks, An Empirical Assessment Across Two Financial Crisis, Working Paper. 257. The difficulties of formulating a theory of the systemic role of bank balance sheets are indeed considerable, ranging from the question of the transmission of idiosyncratic shocks in interbank markets to the questions of the costs and benefits of maturity transformation and the inefficiency of markets with cash- in- the- market pricing; see E.- L. von Thadden, (2011), Discussion of a ‘Pigovian 476 Notes

Tax’ to Liquidity Regulation, International Journal of Central Banking, Vol. 7, pp. 43– 48. The simplicity of the model is its strength and weakness at the same time: ‘it makes it difficult to evaluate how other aspects of banking and financial markets interfere with banking liquidity and why the regulation of banking liquidity may, after all, be such a complicated and controversial problem (p. 44). 258. E. Perotti and J. Suarez, (2009), Liquidity Risk Charges as a Macro- Prudential Tool, A Pigovian Approach to Liquidity Regulation, CEPR Discussion Paper, Nr. 8271, March, pp. 3– 5. 259. E. Perotti, (2010), The Governance of Macro- Prudential Taxation. See also: B. Weder di Mauro, (2010), Taxing Systemic Risk, University of Mainz, Working Paper. 260. C. H. S. Bouwman, (2013), Liquidity: How banks create it and How It Should Be Regulated, Wharton Financial Institutions Center Working Paper. 261. D. Bonfim and M. Kim, (2012), Liquidity Risk in Banking: Is there Herding?, Working Paper. 262. A. N. Berger, C. H. S. Bouwman, T. K. Kick, and K. Schaeck, (2014), Bank Risk Taking and Liquidity Creation Following Regulatory Interventions and Capital Support, Wharton Financial Institutions Center Working Paper. 263. A. Ball, E. Denbee, M. J. Manning, and A. Wheterilt, (2011), Intraday Liquidity: Risk and Regulation, Bank of England Financial Stability Paper, Nr. 11. 264. Bank Liquidity Creation and Risk Taking During Distress, A. N. Berger, C. H. S Bouwman, T. Kick, and K. Schaeck, (2010), Deutsche Bundesbank Discussion Paper Series, Working Paper 2: Banking and Financial Studies, Nr. 5; J. Cao and G. Illing, (2010), Regulation of Systemic Liquidity Risk, Munich University Discussion Paper Nr. 2010– 2011; E. Farhi, M. Golosov, and A. Tsyvinski, (2009), A Theory of Liquidity and Regulation of Financial Intermediation, Review of Economic Studies, Vol. 76, pp. 973– 992. 265. D. Wu and H. Hong, (2013), Liquidity Risk, Market Valuation and Bank Failures, Working Paper. 266. F. Allen and E. Carletti, (2011), Systemic Risk and Macro- Prudential Regulation, University of Pennsylvania Working Paper. They identify six types of systemic risk, namely: (i) common exposure to asset price bubbles, particularly real estate bubbles; (ii) liquidity provision and mispricing of assets; (iii) multiple equilibria and panics; (iv) contagion; (v) sovereign default; and (vi) currency mismatches in the banking system. 267. Most of the literature emerged only after the 2008 financial crisis, with a few notable exceptions: see J.- C. Rochet, (2004), Macroeconomic Shocks and Banking Supervision, Journal of Financial Stability, Vol. 1, Issue 1, pp. 93– 110; J.- C. Rochet, (2008), Liquidity Regulation and the Lender of Last Resort, Financial Stability Review, Vol. 11, pp. 45– 52. He focuses on a number of market failures that can justify liquidity regulation. These include potential problems in payment systems, moral hazard problems at the individual bank level due to opaqueness of assets, and moral hazard at the aggregate level due to expectations of a generalized bailout if there are macro shocks. While the first two can be managed by ratios the latter requires more complex intervention. 268. V. Bruno and H. Shin, (2014), Cross- Border Banking and Global Liquidity, BIS Working Papers, Nr. 458. 269. F. Allen, (2014), How Should Bank Liquidity be Regulated?, Wharton School, University of Pennsylvania Working Paper. Notes 477

270. As they are not Pigovian related they will not be discussed in detail in this context. Refer to A. Milne, (2013), Register, Cap and Trade: A Proposal for Containing Systemic Liquidity Risk, Loughborough University Working Paper, who proposed a Cap and Trade model for liquidity; S. Nicoletti - Altimari and C. Salleo, (2010), Contingent Liquidity, Banca D’Italia, Occasional Papers, Nr. 70, who suggest a new category of securities to satisfy bank’s liquidity needs. These would include a Roll- Over Option Facility (ROOF) that allows the issuer, for a price, to keep the funds if at maturity a readily observable variable correlated with systemic liquidity risk (e.g. the LIBOR- OIS spread) is above a trigger threshold. At rollover the yield would reflect the current price of liquidity and credit risk, making ROOFs attractive to investors. The instrument could attenu- ate a liquidity crisis by reducing banks’ need to roll debt over or sell off assets, and diminish the probability of runs, if markets are convinced that banks can secure sufficient liquidity when needed thanks to the widespread use of this contingent claim. Other suggestions were made by: (1) J. Stein, (2013), Liquidity Regulation and Central Banking, Remarks made at ‘Finding the Right Balance’, 2013 Credit Markets Symposium, Federal Reserve Bank of Richmond, Charlotte, NC: he develops a framework where the market failure is that banks do not take into account all the social benefits of increased liquidity reserves in terms of enhanced financial stability and lower costs to taxpayers. The central bank acting as LOLR is one way to solve this problem. However, Stein argues that it is socially costly to use LOLR capacity because it is difficult to distinguish between illiquidity and insolvency. As a result, it may be better to have liquidity regulation. In addition, it may, in cases where high- quality collateral is in short supply, be optimal to price access to the LOLR as well; (2) M. Bech and T. Keister, (2013), Liquidity Regulation and the Implementation of Monetary Policy’, BIS Working Paper Nr. 432: They consider the effect of liquidity regulation on the implementation of monetary policy. Since monetary policy is typically implemented by central banks targeting the rate in the market for central bank reserves, liquidity regulation may change the relationship between market conditions and the interest rate. That happens in their model because banks are worried about violating the liquidity regulation and are therefore more likely to seek term funding in the market. This results in a steeper yield curve at short maturities; and (3) C. Bouwman, (2014), Liquidity: How Banks Create It and How It Should Be Regulated, A. N. Berger, P. Molyneux, and J. O. S. Wilson (eds.), The Oxford Handbook of Banking, 2nd Ed., which also includes an extensive literature review: In her view, the need for regulation arises because of moral hazard associated with deposit insurance and the discount window. One of the points she stresses is the importance of the interaction between capital and liquidity regulation and the need for both to be done in concert. 271. W. Buiter, (2007), Lessons from the 2007 Financial Crisis, CEPR Discussion Paper, Nr. DP6596: ‘Liquidity is a public good. It can be managed privately (by hoarding inherently liquid assets), but it would be socially inefficient for private banks and other financial institutions to hold liquid assets on their balance sheets in amounts sufficient to tide them over when markets become disorderly. They are meant to intermediate short maturity liabilities into long maturity assets and (normally) liquid liabilities into illiquid assets. Since central banks can create unquestioned liquidity at the drop of a hat, in any amount and at zero cost, they should be the liquidity providers of last resort both as lender of last resort and as market maker of last resort...’ also cited in F. Allen, 478 Notes

(2014), How Should Bank Liquidity be Regulated?, Wharton School, University of Pennsylvania Working Paper, p. 3. 272. See on a (possible) optimal relationship between capital and liquidity regulation: A. Walther, (2013), Jointly Optimal Regulation of Bank Capital and Liquidity, Cambridge University Working Paper. 273. D. Elliott, S. Salloy, and A Santos, (2012), Assessing the Cost of Financial Regulation, IMF Working Paper, Nr. 12/233, p. 43. 274. F. Allen, (2014), How Should Bank Liquidity be Regulated?, Wharton School, University of Pennsylvania Working Paper, p. 24 and W. Buiter, (2007), Lessons from the 2007 Financial Crisis, CEPR Discussion Paper, Nr. DP6596 and J. E. Stiglitz, (2014), Tapping the Brakes: Are Less Active Markets Safer and Better for the Economy?, Presented at the Federal Reserve Bank of Atlanta 2014 Financial Markets Conference, April 15. 275. See for further details: European Banking Federation, (2014), Bank Leverage and its Economic Implications, Working Paper. 276. In the USA that is more balanced between FIs and market- based lending. It is very likely that Europe will evolve in that direction, given the content of the Basel III rules. 277. The airline industry is a notable example of having a very high fixed- to- total cost ratio (around 85– 90% depending on efficiency) requiring a load factor of around 85– 86% just to break even. 278. There is hybrid capital with profit- dependent interest rates and floating interest rates. This category of mezzanine debt is still a minor player relative to fixed senior debt. See in detail on the category: L. Nijs, (2014), Mezzanine Financing: Tools, Applications and Total Return, Wiley & Sons, Surrey. 279. I. Kienna and E. Jokivuolle, (2014), Does a Leverage Ratio Requirement Increase Bank Stability?, ECB Working Paper Series, Nr. 1676. The leverage ratio induces FIs with low-risk lending strategies to diversify into high- risk investments until the leverage ratio no longer constitutes a binding capital constraint on them. 280. See for an overview of the rules regarding deduction of interest deduction (‘thin capitalization rules’): J. Blouin et al., (2014), Thin Capitalization Rules and the Multinational Firm Capital Structure, EC Taxation Papers Series, Working Paper Nr. 42. 281. Which is an option the Belgian government took through its ‘notional interest deduction program’ introduced in 2006. 282. See for an overview: V. Fleischer, (2011), Tax Reform and the Tax Treatment of Debt and Equity, Joint Hearing, U.S. House of Representatives, Committee on Ways and Means, U.S. Senate Committee on Finance, pp. 2– 4, who suggests a thin cap- like tax on debt to remove the tax incentive to increase leverage beyond the ratio that would arise in a world without taxes and avoid regulatory arbitrage. 283. Ibid. p. 11. 284. J.- H. Hahm, H. S. Shin, and K. Shin, (2013), Non- Core bank Liabilities and Financial Vulnerability, Journal of Money, Credit and Banking, Vol. 45, Issue 1, pp. 3– 36. Their position is in line with other literature to this effect, i.e. credit demand is larger than deposit growth (‘sticky’) in economic boom times. In this way, a higher incidence of non- core funding will be associated with above- trend growth in credit and compressed risk premiums. 285. J.- H. Hahm, et al. (2012), Non- Core bank Liabilities and Financial Vulnerability, Journal of Money, NBER Working Paper Nr. 18428, p. 2. Notes 479

286. But less predictive in the event of a stock market crash. 287. J.- H. Hahm, et al. (2012), Non- Core bank Liabilities and Financial Vulnerability, Journal of Money, NBER Working Paper Nr. 18428, p. 37. 288. Ibid. p. 28. 289. One of the authors had already done so in 2010; see: H. S. Shin, (2010), Non- Core Liabilities Tax as a Tool for Prudential Regulation, Policy Memo. 290. Measures aimed at building resilience against external financial shocks, especially against its well- known vulnerability to capital flow reversals in the banking sector and the associated disruptions to domestic financial conditions. South Korea is particularly sensitive to external capital shock in their banking system and economy. 291. V. Bruno and H. S. Shin, (2013), Assessing Macro- Prudential Policies: Case of Korea, Scandinavian Journal of Economics, Vol. 116, Issue 1, pp. 128– 157. 292. The macroprudential measures introduced from 2010 were aimed at moderat- ing the procyclicality of the banking sector by dampening the fluctuations in the growth of so- called ‘ non- core’ bank liabilities, especially cross- border banking sector liabilities (p. 32). 293. V. Bruno and H. S. Shin, (2011), Capital Flows, Cross- Border Banking and Global Liquidity, Princeton Working Paper. 294. V. Bruno and H. S. Shin, (2013), Assessing Macro- Prudential Policies: Case of Korea, Scandinavian Journal of Economics, Vol. 116, Issue 1, p. 2. 295. They confirm the earlier findings on the importance of gross capital flows between countries in determining financial conditions, especially the gross flows intermediated by the banking sector; see: C. Borio and P. Disyatat, (2011), Global Imbalances and the Financial Crisis: Link or no Link?, BIS Working Papers, Nr. 346 and P.- O. Gourinchas and M. Obstfeld, (2012), Stories of the Twentieth Century for the Twenty- First, American Economic Journal, Macroeconomics, Vol. 4, Issue 1, pp. 226– 265; M. Obstfeld, (2012), Financial Flows, Financial Crises, and Global Imbalances, Journal of International Money and Finance, Vol. 31, pp. 469– 480. Bank capital flows have also been pivotal in the European financial crisis. The credit booms in countries such as Ireland and Spain were financed primarily by capital flows through the banking sector; see: P. Lane and B. Pels, (2011), Current Account Balances in Europe, Working Paper, Trinity College Dublin. 296. See comprehensively: V. Bruno and H. S. Shin, (2014), Globalization of Corporate Risk Taking, Princeton Working Paper. 297. J. Dow and J. Han, (2014), Contractual Incompleteness, Limited liability and Bubbles, Swedish House of Finance Research Paper, Nr. 14/03. 298. J. Cochrane, (2014), Towards a Run- Free Financial System, Chicago Booth School of Business Working Paper. 299. N. Kocherlakota, (2010), Taxing Risk and the Optimal Regulation of Financial Institutions, Economic Policy Paper Nr. 10- 3, Federal Reserve Bank of Minneapolis. Perotti and Suarez Ibid. follow in that tradition. It has also created alternative movements, for example those who suggest a cap- and- trade model: See in detail: J. Stein, (2012), Monetary Policy as Financial Stability Regulation, Quarterly Journal of Economics, Vol. 127, pp. 57– 95 and J. Stein, (2014), Incorporating Financial Stability Considerations into a Monetary Policy Framework, Speech, March 21. 300. J. Cochrane, (2014), Towards a Run- Free Financial System, Chicago Booth School of Business Working Paper, p. 19. 480 Notes

301. Ibid. p. 19. 302. Quantitative capital ratio regulations quickly lead to arguments and games. Should the denominator be ‘risk- weighted’ assets or total assets, or should the capital requirement be based on a full- value- at- risk model? The total- assets approach has a satisfying simplicity. See in detail: D. Duffie, (2014), Is Keeping It Simple for Banks Stupid?, Bloomberg View, January 7 and D. Duffie, (2010), How Big Banks Fail and What to Do about It, Princeton University Press, Princeton, NJ. 303. J. Cochrane, (2014), Towards a Run- Free Financial System, Chicago Booth School of Business Working Paper, p. 20. 304. I. Ben- David, F. Franzoni, and R. Mousawai, (2014), Do ETFs increase Volatility, NBER Working Paper, Nr. 20071. They study whether exchange traded funds – an asset of increasing importance – impact the volatility of their underlying stocks. Using identification strategies based on the mechanical variation in ETF ownership, they present evidence that stocks owned by ETFs exhibit significantly higher intraday and daily volatility. They estimate that an increase of one standard deviation in ETF ownership is associated with an increase of 16% in daily stock volatility. The driving channel appears to be arbitrage activity between ETFs and the underlying stocks. Consistent with this view, the effects are stronger for stocks with lower bid- ask spread and lending fees. The evidence further suggests that ETF ownership increases stock turnover, which in turn suggests that ETF arbitrage adds a new layer of trading to the underlying securities. 305. And related categories ETNs (Exchange Traded Notes), and the wider category of Exchange traded Products (ETPs). 306. F. Zhang, (2010), High Frequency Trading, Stock Volatility and Price Discovery, Yale School of Management Working Paper. It contrasts, however, with a more recently but commercially commissioned study by the Futures Industry Association: N. P. B. Bollen and R. E. Whaley, (2013), Futures Market Volatility, Vanderbilt University, Owen Graduate School of Management Working Paper. The latter found that there is ‘no evidence to suggest that realized return volatility in electronically- traded futures markets has changed through time. … We now have empirical evidence that volatility in the futures markets has neither increased nor decreased once the effects of macroeconomic shocks are removed’. 307. See B. Biais, T. Foucault, and S. Moinas, (2014), Equilibrium Fast Trading, Working Paper. They argue that high- speed market connections and information processing improve the ability to seize trading opportunities, raising gains from trade. They also enable fast traders to process information before slow traders, generating adverse selection and thus negative externalities. When investing in fast- trading technologies, institutions do not internalize these externalities. Besides banning them altogether, a Pigovian tax is suggested on the technology that enables high- speed trading. 308. Margin- based investing is essentially investing with someone else’s capital (often that of your bank or broker, who provides the capital as a debt facility) while depositing only a limited amount of collateral yourself, in case your trade goes wrong but you still have to repay your debt to your broker. It has been proven that pure command- and- control regulation seems to have little effect on volatility. A countercyclical Pigovian instrument seems better to dampen volatility caused by the collateral constraint through margin lending. See in detail: J. Brumm et al., (2014), Margin Regulation and Volatility, ECB Working Paper Series, Nr. 1698. Notes 481

309. H. Zhu, (2014), Do Dark Pools Harm Price Discovery, Review of Financial Studies, Vol. 27, Issue 3, pp. 747– 789. Dark pools are equity trading systems that do not publicly display orders. They offer potential price improvements but do not guarantee execution. Zhu concludes that the existence of dark pools tends to improve the price discovery function on the official exchanges (though it also leads to reduced exchange liquidity), but draws uninformed investors into the dark pools. He further concludes that the effect of the dark pool on price discovery can become weaker the longer the information horizon, and that although the dark pool can improve price discovery on average, it can harm price discovery in some rare realizations of uninformed order imbalance. See in general S. Patterson, (2013), Dark Pools: The Rise of the Machine Trader and the Rigging of the U.S. Stock Market, Crown Business, New York and M. Lewis, (2014), Flash Boys: A Wall Street Revolt, W.W. Norton & Company, New York. 310. Z. Pozsar and M. Singh, (2011), The Nonbank- Bank Nexus and the Shadow Banking System, IMF Working Paper, WP/11/289. 311. The objective here is not to provide a full analysis of shadow banking but only to focus on the externality- inducing activities embedded in the shadow banking sector. For a comprehensive review of all aspects of shadow banking see: L. Nijs, (2016), The Global Handbook on Shadow Banking, Wiley & Sons, Surrey, forthcoming. 312. See Ibid. 313. See in detail: B. M. Lawsky, (2013), Shining a Light on Shadow Insurance: A Little-known Loophole That Puts Insurance Policyholders and Taxpayers at Greater Risk, New York State Department of Financial Services Report; R. S. J. Kooijen and M. Yogo, (2013), Shadow Insurance, NBER Working Paper, Nr. 19568. 314. See in detail: FSB, (2013), Strengthening Oversight and Regulation of Shadow Banking Policy Framework for Strengthening Oversight and Regulation of Shadow Banking Entities, pp. 6– 11. 315. A tremendous problem still is the data- availability of the sector and the consistency in reporting terms on a per- country basis. That is particularly relevant, as shadow banking markets differ significantly in nature and content between countries. 316. S. Claessens and L. Ratnovski, (2014), What is Shadow Banking?, IMF Working Paper, WP/14/25. 317. Ibid. p. 5. 318. Ibid. 319. Claessens et al provide some examples: ‘Examples include, besides the general implicit guarantee provided to the “ too- big- to- fail,” large banks active in shadow banking, the Federal Reserve Term Securities Lending Facility (TSLF) that backstops the collateral intermediation processes, the implicit too- big- to- fail guarantees for tri- party repo clearing banks and other dealer banks, the bankruptcy stay exemptions for repos which in effect guarantee the exposure of lenders, or the implicit, reputational and other guarantees on bank- affiliated products or on liabilities of nonbank finance companies’ (pp. 5– 6). 320. It is impossible to provide a full review of the techniques, and therefore the focus will be on the externality- inducing elements of the shadow banking activities, as that is what links to a Pigovian application in the shadow banking sector. 321. E. Perotti, (2013), The Roots of Shadow Banking, CEPR Paper, Nr. 69. 482 Notes

322. A. Jobst, (2008), What is Securitization, Finance and Development, September, pp. 48– 49. 323. The drivers behind the rise in investor demand for securitized products in the run- up to the crisis have long been ignored. More recently it was identified that both agency problems and neglected risks played an important role in driving investor demand for nontraditional securitizations prior to the crisis; see S. Chernenko, S. Hanson, and A. Sunderam, (2013), The Rise and Fall of Securitization, Harvard Business School Working Paper. 324. See in detail: S. Claessens et al. (2012), Shadow Banking: Economics and Policy, IMF Staff Discussion Note, SDN 12/12, December, pp. 6– 10. 325. See for a detailed analysis of the securitization process: Z. Poszar, (2008), The Rise and Fall of the Shadow Banking System, Regional Financial Review, July, pp. 13– 25. For a detailed analysis of the intermediation process see: Z. Poszar, T. Adrian, A. Ashcraft, and H. Boesky, (2013), Shadow Banking, Federal Reserve Bank of New York Economic Policy Review, December, pp. 1– 16. 326. M. Knaup and W. Wagner, (2010), Measuring the Tail Risks of Banks, Working Paper; W. S. Frame, L. Wall, and L. J. White, (2012), The Devil is in the Tail: Residential Mortgage Finance and the U.S. Treasury, Working Paper Federal Reserve Bank of Atlanta 2012 Financial Markets Conference; M. R. C. van Oordt and C. Zhou, (2013), Systematic Tail Risk, DNB Working Paper, Nr. 400. 327. F. Battaglia and A. Gallo, (2012), The Impact of Securitization on Tail and Systemic Risk: Evidence From the Financial Crisis, Working Paper. 328. V. V. Acharya, T. F. Cooley, M. P. Richardson, and I. Walter, (2010), Regulating Wall Street: The Dodd Frank Act and the New Architecture of Global Finance, Wiley and Sons, Hoboken, Chapter 4. 329. W. Jiangli and M. Pritsker, (2008), The Impact of Securitization on bank Holding Companies, FDIC/FRB Working Paper; W. Jiangli, M. Pritsker, and P. Raupach, (2007), Banking and Securitization, FDIC Working Paper. 330. That happened because the demand for those products was higher than the supply, despite the fact that in the years before the crisis the industry produced over US$1 trillion in securitized assets. 331. J. Brunsden et al. (2014), Draghi’s ABS- Market Revival Set for Boost from Regulators, Bloomberg.com, September 16. Remarkably enough, there seems to be no relationship whatsoever between the size of the program suggested by the ECB and the actual securitization market in Europe (see: C. Altomonte and P. Bussoli, (2014), Asset- Backed Securities: They Key to Unlocking Europe’s Credit markets, Bruegel Policy Contribution, Nr. 2014/7), hinting at a shadow agenda on behalf of the ECB. 332. T. Alloway, (2014), Sliced and Diced Debt Deals Make Roaring Comeback, Financial Times, June 4. 333. Low or no inflation is, however, caused by the deleveraging that is ongoing at the level of households, corporations, and governments alike and reflects the decrease in purchasing power in large parts of society due to unemployment and a variety of austerity measures. Low inflation is therefore totally acceptable and perfectly explainable and cannot warrant monetary intervention. 334. See: S. Fleming and C. Giles, (2014), Bank of England: Crashing the Party, Financial Times, June 24. 335. R. G. Rajan, (2005), Has Financial Development Made the World Riskier?, NBER Working paper, Nr. 11728. 336. T. Piskorski, A. Seru, and V. Vig, (2010), Securitization and Distressed Loan Renegotiation: Evidence from the Subprime Mortgage Crisis, Chicago Booth Notes 483

School of Business Research Paper, Nr. 09- 02; J. P. Hunt, (2010), What Do Sub- Prime Securitization Contracts Actually Say About Loan Modification? Preliminary Results and Implications, Berkeley Center for law, Business and the Economy Working Paper. The current monetary policies also add to inequality as they favor investors in certain securities over others. 337. D. Solomon, (2012), The Rise of a Giant: Securitization and the Global Financial Crisis, American Business Law Journal, Vol. 49, Issue 4, pp. 859 ff. 338. A. J. Levitin, (2013), The Paper Chase: Securitization, Foreclosure and the Uncertainty of the Mortgage Title, Duke Law Journal, Vol. 63, pp. 637– 734. 339. M. Pagano and P. Volpin, (2012), Securitization, Transparency and Liquidity, London Business School Working Paper. 340. X. Dou and J. Wang, (2014), Asset Securitization and Bubbles: An Illustration of Subprime Mortgage Default Crisis, Advances in Economics and Business, Vol. 2, Issue 2, pp. 112– 119. 341. A. G. Anderson, (2013), Ambiguity in Securitization Markets, Cornell University Johnson School Research Paper Series, Nr. 5- 2013. 342. A. Schleifer and R. W. Vishny, (2010), Asset Fire Sales and Credit Easing, American Economic Review: Papers & Proceedings, Vol. 100, Issue 2, pp. 46– 50. 343. Also in the USA as generally understood: A. J. Levitin, A. D. Pavlov, and S. M. Wachter, (2009), Securitization: Cause or Remedy of the Financial Crisis?, Georgetown Law and Economics Research Paper, Nr. 1462895. 344. See in detail: D. O. Beltran and C. P. Thomas, (2010), Could Asymmetric Information Alone Have Caused the Collapse of Private- Label Securitization?, International Finance Discussion Papers, FED US. 345. A. Fostel and J. Geneakoplos, (2011), Tranching, CDS and Asset Prices: Bubbles and Crashes, Princeton Working Paper; J. C. Stein, (2010), Securitization, Shadow Banking and Financial Fragility, Harvard University Working Paper. 346. A. J. Levitin and S. M. Wachter (2012), Explaining the Housing Bubble, Georgetown Law Journal, Vol. 100, Issue 4, pp. 1177– 1258; M. N. Baily, R. E. Litan, and M. S. Johnson, (2008), The Origins of the Crisis, Fixing Finance Series, Nr. 3, Brookings Institute. 347. How that relationship works mathematically is still largely undefined. Nevertheless, the causality has been repeatedly proven. See in detail regarding the relationship between liquidity and real estate prices: A. Cesa- Biachi et al., (2015), Global Liquidity, House Prices, and the Macroeconomy: Evidence from Advanced and Emerging Economies, IMF Working Paper, Nr. WP/15/23. 348. ‘Excess’ refers here to levels elevated above those normally warranted given the level of economic activity and interest rates in the market at any given point in time. 349. Y. Amihud, H. Mendelson, and L.H. Pedersen, (2005), Liquidity and Asset Prices, Foundations in Trends and Finance, Vol. 1, Issue 4, pp. 269– 364. 350. A. Bruggeman, (2007), Can Excess Signal an Asset Price Boom?, NBB Working Paper, Nr. 117; B. Bierut, (2013), Global Liquidity as an Early Indicator of Asset Price Booms, DNB Working Paper, Nr. 377. 351. P. Hörhdahl and F. Packer, (2006), Understanding Asset Prices An Overview, BIS Papers Nr. 34. 352. Through tranching, See in detail: A. Antoniades and A. Tarashev, (2014), Securitizations: Tranching Concentrates Uncertainty, BIS Quarterly Review December, pp. 37– 53. The new December 2014 issued securitization standards contribute very little to solving this problem; see in extensor: BIS, (2014), Revisions to the Securitizations Framework, Basel III Document. 484 Notes

353. J. Hessel and J. Peeters, (2011), Housing Bubbles, the Leveraging Cycle and Role of Central Banking, DNB Occassional Studies, Vol. 9, Nr. 5. 354. J. Huang and J. Wang, (2010), Market Liquidity, Asset Prices and Welfare, Journal of Financial Economics, Vol. 95, Issue 1, pp. 107– 127, previously released as MIT Working Paper (2008) and NBER Working Paper, Nr. 14058 (2008). 355. L. Arrondel et al., (2014), Wealth and Income in the Euro Area. Heterogeneity in Households’ Behaviours, ECB Working Paper Series, Nr. 1709. 356. M. Wolf, (2014), Deeper Reform of Housing Finance is Vital for Stability, Financial Times, September 18. 357. Although the regulatory framework has always been quite unstable; see: E. J. Janger, (2002), Muddy rules for Securitization, Fordham Journal of Corporate and Financial Law, Vol. 7, Issue 2, pp. 300– 320. 358. M. Segoviano, B. Jones, P. Lindner, and J. Blankenheim, (2013), Securitization: Lessons Learned and the Road Ahead, IMF Working Paper, WP/13/255. 359. Those standards have been awaited and were under development by the bank for International Settlements. A consultative document was released in 2013; see: BIS, (2013), Revisions to the Securitization Framework, December. Post- closing of the manuscript the final securitization framework has been released; see BIS, (2014), Revisions to the Securitization Framework, Basel III Document, Basel Committee on banking Supervision, Basel. Major changes include the drivers behind risk exposures and the regulatory capital that banks should hold when engaging in various types of securitizations. 360. M. Marques- Ibanez, Y. Altunbas, and M. van Leuvensteijn, (2014), Competition and Bank Risk. The Effect of Securitization and Bank Capital, ECB Working Paper Series Nr. 1678. 361. See in detail: FSB, (2012), Securities lending and Repos: Market Overview and Financial Stability Issues, Interim Report of the FSB Workstream on Securities Lending and Repos, pp. 1– 5. 362. Ibid. pp. 6– 10. 363. FSB, (2012), Strengthening Oversight and Regulation of Shadow Banking. A Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos. 364. FSB, (2013), Strengthening Oversight and Regulation of Shadow Banking. A Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos. 365. A. Shleifer and R. Vishny, (2011), Fire Sales in Finance and Macroeconomics, Journal of Economic Perspectives, Vol. 25 (Winter), pp. 30 ff. 366. See J. C. Stein, (2013), The Fire- Sales Problem and Securities Financing Transactions, Speech October 3, At the Federal Reserve Bank of New York Workshop on Fire Sales as a Driver of Systemic Risk in Tri- party Repo and other Secured Funding Markets, New York. 367. G. Antinolfi, F. Carapella, C. Kahn, A. Martin, D. Mills, and E. Nosal, (2013), Repos, Fire Sales and Bankruptcy Policy, Federal Reserve Bank of Chicago Working Paper Nr. 2012– 15. 368. See for the historical context: A. Copeland, A. Martin, and M. Walker, (2010), The Tri- Party Repo Market before the 2010 Reforms, Federal Reserve Bank of NY Staff Report Nr. 477 and A. Copeland, D. Duffie, A. Martin, and J. McLaughlin, (2012), Key Mechanics of the U.S. Tri- Party Repo Market, Federal Reserve Bank of New York Economic Policy Review, Vol. 18, Issue 3, pp. 17– 28. Notes 485

369. B. Begalle, A. Martin, J. McAndrews, and S. McLaughlin, (2013), The Risk of Fire- Sales in the Tri- Party Repo Market, Federal Reserve Bank of New York Staff Reports, Nr. 616. 370. See also: G. Gorton and A. Metrick, (2012), Securitized Banking and the Run on Repo, Journal of Financial Economics, Vol. 104, Issue 3, pp. 425– 451; A. Krishnamurthy, S. Nagel, and D. Orlov, (2012), Sizing Up Repo, NBER Working Paper, Nr. 17768; A. Martin, D. Skeie, and E.- L. von Thadden, (2010), Repo Runs, Federal Reserve Bank of New York Staff Report, Nr. 444; A. Martin, D. Skeie, and E.- L. von Thadden, (2012), The Fragility of Short- Term Funding Markets, Working Paper; C. Merrill, T. D. Nadauld, R. M. Stulz, and S. M. Sherlund, (2012), Why Did Financial Institutions Sell RMBS at Fire Sales Prices During the Financial Crisis? Manuscript, unpublished. 371. A fire sale in this scenario is caused by a flight from maturity (‘shortening maturities’); see in detail: G. B. Gorton et al., (2014), The Flight from Maturity, NBER Working Paper, Nr. 20027. 372. V. V. Acharya and S. Oncu, (2013), A Proposal for the Resolution of Systemically Important Assets and Liabilities: The Case of the Repo Market, International Journal of Central Banking, Vol. 9, Issue 1, pp. 291– 350. 373. T. Adrian and H. S. Shin, (2010), Liquidity and Leverage, Journal of Financial Intermediation, Vol. 19, pp. 418– 437. 374. A. Shleifer and R. Vishny, (1992), Liquidation Values and Debt Capacity: A Market Equilibrium Approach, Journal of Finance, Vol. 47, Issue 4, pp. 1343– 1366. 375. R. Greenwood, A. Landier and D. Thesmar, (2012), Vulnerable Banks, NBER Working Paper, Nr. 18537. 376. A first attempt is made. See: F. Duarte and T. M. Eisenbach, (2014), Fire- Sale Spillovers and Systemic Risk, Federal Reserve Bank of NY Working Paper, Nr. 645. 377. H. M. Ennis, (2011), Strategic Behavior in the Tri- Party Repo Market, Economic Quarterly, Vol. 97, Issue 4, pp. 389– 413. 378. FSB, (2014), Strengthening Oversight and Regulation of Shadow Banking, Regulatory Framework for Haircuts on Centrally- Cleared Securities Financing Transactions, October 14. 379. There are more specifically two notions of rehypothecation. The first (narrow) notion of rehypothecation relates to how broker- dealers (and no other market participants) should handle the securities of their customers: If they can use their customers’ securities as they see fit, we say that broker- dealers enjoy a rehypothecation right. The second notion, as proposed by the International Swaps and Derivatives Association (ISDA), applies to any secured lender, not only to broker- dealers: The right of rehypothecation refers to the right of a secured party to sell, pledge, rehypothecate (in its narrow definition above), assign, invest, use, commingle, or otherwise dispose of posted collateral. In what follows, I will use the broader definition of rehypothecation, which, simply put, says that a lender with collateral can use it as if it was his or her own asset; see: C. Monnet, (2011), Rehypothecation, Philadelphia FED Business Review, quarter 4, pp. 18– 25. 380. There are some countries in which there are limitations on how much (of their total collateral portfolio) an intermediary can put to work this way; however, in most countries it is uncapped. 486 Notes

381. M. Singh and J. Aitken, (2010), The (Sizable) Role of Rehypothecation in the Shadow Banking Sector, IMF Working Paper, WP/10/172. 382. Among the greatest benefits of rehypothecation is capital efficiency in funding intermediation. Because collateral is repledged, less capital is needed to fund new debt or yield- seeking activities. Rehypothecation reduces the cost of pledg- ing collateral, leveraging a greater amount of funding on a relatively smaller capital base. However, there are significant risks when leverage and financial layering become too complex and opaque to discern whether a reasonable capital cushion exists to cover potential asset price declines (infra); see: D. Luttrel, H. Rosenblum, and J. Thies, (2012), Understanding the Risks Inherent in Shadow Banking. A Primer and Practical Lessons Learned, Dallas FED Staff papers, Nr. 18, pp. 35– 40. 383. M. Brunnermeier and L. Pedersen, (2008), Market Liquidity and Funding Liquidity, Review of Financial Studies, Vol. 22, Issue 6, pp. 2201– 2238. 384. C. Johnson, (1997), Derivatives and Rehypothecation Failure. It’s 3:00 pm. Do You Know Where Your Collateral Is? Arizona Law Review, Vol. 30, pp. 949 ff. 385. BIS, (2013), Asset Encumbrance, Financial Reform and the Demand for Collateral Assets, Report submitted by a Working Group established by the Committee on the Global Financial System, CGFS Papers, Nr. 49; J. C. Lopez, R. Mendes, and H. Vickstedt, (2013), The Market for Collateral: The Potential Impact of Financial Regulation, Bank of Canada, Financial System Review (June), pp. 45– 53. 386. The other part of regulation focuses on more transactions being cleared over a central clearing party (CCP); see: D. Duffie, M. Scheicher, and G. Vuillemey, (2014), Central Clearing and Collateral Demand, ECB Working Paper Series Nr. 1638. 387. M. Singh, (2010), Undercollateralisation and Rehypothecation in the OTC Derivative Markets, Financial Stability Review (July), pp. 113– 119. 388. V. Maurin, (2014), Re- Using the Collateral of Others: A General Equilibrium Model of Rehypothecation, European University Institute Working Paper. 389. See in detail: S. L. Schwarcz, (2010), Distorting Legal Principles, The Journal of Corporate Law, Vol. 35, Issue 4, pp. 697– 727. However, its distortion of nemo dat creates uncertainty (in the case of rehypothecation) when customer securities become subject to claims of an intermediary’s creditors, to whom the securities have been rehypothecated. If customer securities were to become subject to those claims, customers could lose their securities if the intermediary fails. Rehypothecation, although a long- standing practice (one may always grant a security interest in property to the extent of one’s rights therein), its operational execution has changed and became flawed. Lehman Brothers Inc. (for example), like many other prime- brokerage intermediaries, insisted that customers contractually consent to allow the intermediary to directly rehypothecate the customers’ securities as collateral for financing obtained by the intermediary. The practice is conceptually flawed, in that the intermediary does not own those securities but merely holds those securities on behalf of its customers, who at most give the intermediary a security interest in those securities. Lacking ownership of the customers’ securities, the intermediary should not be able, under the principle of nemo dat, to grant a security interest that enables its creditors to obtain ownership of those securities through foreclosure. Conceptually, therefore, Lehman and other prime- brokerage intermediaries ignored nemo dat when engaging in this form of rehypothecation (pp. 702– 703); For an evaluation of the net benefit or harm of the technique see pp. 705– 711); see also Notes 487

M. Singh and J. Aitkin, (2009), Deleveraging after Lehman – Evidence from Reduced Rehypothecation, IMF Working Paper, WP/09/42. 390. See in detail: M. Singh, (2011), Velocity of Pledge Collateral: Analysis and Implications, IMF Working Paper, WP/11/256. 391. A. Copeland, D. Duffie, A. Martin, and S. McLaughlin, (2012), Key Mechanics of the U.S. Tri- Party Repo market, FRBNY, Working Paper. 392. A most notable example is that of MF Global, which went bankrupt in 2011. MF Global’s demise is often attributed to its use of off- balance- sheet repur- chase agreements called ‘repo- to- maturity’. The repo- to- maturity transactions involved borrowing billions of dollars backed by European sovereign debt due to expire at the same time. Because the loan collateral and the loan itself were set to mature simultaneously, MF Global was allowed to treat the transaction as a ‘sale’ under generally accepted accounting principles. 393. J. Authors, (2014), Democratization of Finance, Financial Times, June 23; P. Jenkins, (2014), Into the Shadows: Taking Another Path, Financial Times, June 16 and P. McCulley, (2014), Make Shadow Banks Safe and Private Money Sound, Financial Times, June 16. 394. The technology stock bubble of the late 1990s had very few lasting economic effects on the economy due to this once it deflated. 395. D. Luttrel, H. Rosenblum, and J. Thies, (2012), Understanding the Risks Inherent in Shadow Banking: A Primer and Practical Lessons Learned, Dallas FED Staff papers, Nr. 18, p. 38. 396. Regarding the evaluation after the 1930 crisis see in detail: K. J. Mitchener and K. Wandschneider, (2014), Did Capital Controls Help Countries Recover from the Great Depression of the 1930s, NBER Working paper, Nr. 20220, June 26. Similar results have been yielded regarding the aftermath of the 2008 crisis. 397. Freedom without restrictions has never yielded an optimal long- term optimum ( short-term seems unsatisfying as well, as it cannot be sustained). Optimization requires balancing resources and capabilities over longer periods of time and carefully monitoring the net benefits of efforts undertaken so as to ensure the accumulation of wealth across generations. 398. O. Jeanne and A. Korinek, (2010), Managing Credit Booms and Busts: A Pigovian Tax Approach, NBER Working Paper Series, Nr. 16377. 399. They do so by using a specific starting point: ‘consider a group of individuals (the insiders) who enjoy a comparative advantage in holding an asset and who can use this asset as collateral on their borrowing from outsiders. The borrowing capacity of insiders is therefore increasing in the price of the asset. The price of the asset, in turn, is driven by the insiders’ consumption and borrowing capacity. This introduces a mutual feedback loop between asset prices and credit flows: small financial shocks to insiders can lead to large simultaneous booms or busts in asset prices and credit flows’ (p. 2). 400. O. Jeanne and A. Korinek, (2010), Managing Credit Booms and Busts: A Pigovian Tax Approach, NBER Working Paper Series, Nr. 16377, p. 2. 401. (1) They change the nature of the shock by assuming that it affects the availability of credit rather than the income of insiders. Then they look at the case where insiders can issue (2) long- term debt or (3) equity. All three of these exten- sions change some features of the boom– bust cycle equilibrium, but it remains true that the constrained optimum can be achieved by a countercyclical tax on debt, and this tax is of the same order of magnitude as in the benchmark model. Finally, they compare ex ante prudential taxation to ex post interventions 488 Notes

that provide funds to constrained borrowers in a bust. They find that a bailout insurance fund that accumulates resources in good times and transfers them to debtors in a bust does not increase welfare (unless the resources are levied through the optimal Pigovian tax) (p. 3). 402. See among others. G. Lorenzoni, (2008), Inefficient Credit Booms, Review of Economic Studies, Vol. 75, Issue 3, pp. 809– 833. 403. The case where the sensitivity of the credit constraint to the collateral price is large enough to produce multiple equilibria and self- fulfilling asset price busts (p. 33). 404. See in extenso: IMF, (2009), What’s the Damage? Medium- Term Output Dynamics after Financial Crises, Chapter 4, World Economic Outlook, pp. 121– 151. 405. If there is nominal stickiness, a monetary restriction that raises the real interest rate in the boom should have the same macroprudential effect as the Pigovian tax discussed (O. Jeanne and A. Korinek, (2010), Managing Credit Booms and Busts: A Pigovian Tax Approach, NBER Working Paper Series, Nr. 16377, p. 34). 406. See in detail: E. Nier and T. Sadi Sedik, (2014), Gross Private Capital Flows to Emerging Markets: Can the Global Financial Cycle be Tamed, IMF Working Paper Nr. WP/14/196. 407. See for support very recently: M. Saeed Qureshi et al., (2014), Regulating Capital Flows at Both Ends. Does it Work, IMF Working Paper Nr. WP/14/188. They focus on the coordination between source and recipient countries as a policy tool to manage cross- border capital flows and the spillover effects it might create. 408. O. Jeanne and A. Korinek, (2010), Excessive Volatility in Capital Flows: A Pigovian Taxation Approach, NBER Working Paper Series, Nr. 15927. 409. Mainly to and from emerging markets in their case. 410. See also A. Korinek, (2010), Regulating Capital Flows to Emerging markets; An Externality View, Johns Hopkins University Working Paper. 411. O. Jeanne and A. Korinek, (2010), Excessive Volatility in Capital Flows: A Pigovian Taxation Approach, NBER Working Paper Series, Nr. 15927, p. 10. 412. With a 10% probability. 413. Chile had a similar measure in place during the period 1991– 1998, See in extenso: F. Gallego, L. Hernandez, and K. Schmidt- Hebbel, (2002), Capital Controls in Chile: Were They Effective?, in L. Hernandez and K. Schmidt- Hebbel (eds.), Banking, Financial Integration, and Crises, Central Bank of Chile, Santiago, pp. 361 ff. 414. The optimal policy mix in such models involves a combination of both types (i.e. ex ante and ex post) of measures since they offer alternative ways of mitigating binding financial constraints. Comparing their relative merits, ex post policy interventions are only taken once a crisis has materialized and are therefore better targeted, whereas ex ante measures are blunter since they depend on crisis expectations. However, ex post interventions distort incentives and create moral hazard. This introduces a time consistency problem, which can in turn be solved by ex ante policy measures. 415. O. Jeanne and A. Korinek, (2013), Macro- prudential Regulation versus Mopping Up after the Crash, NBER Working Paper Series, Nr. 18675. 416. See A. Korinek and J. Kreamer, (2013), The Redistributive Effects of Financial Deregulation, NBER Working Paper Series, Nr. 19572. 417. A. Korinek and A. Simsek, (2014), Liquidity Trap and Excessive Leverage, NBER Working Paper Series, Nr. 19970. Notes 489

418. As we have experienced in most parts of the Western world in recent years. A number of countries have stepped out of that rate race (Australia, Brazil, Russia, …) for a variety of reasons. See also in detail the proposition of international coordination in the context of a Pareto optimum through international coordination of policies: O. Jeanne, (2014), Macro- prudential Policies in a Global Perspective, NBER Working Paper Series, Nr. 19967. 419. O. Jeanne and A. Korinek, (2014), Macro- Prudential Policy Beyond Banking Regulation, Banque de France, Financial Stability Review, Nr. 18, April 2014, pp. 163– 171. 420. S. Claessens, (2014), An Overview of Macro- prudential Policy Tools, IMF Working Paper Series, Nr. WP/14/214. 421. Ibid. p. 3. 422. Ibid. p. 5. He uses a more reduced number/categories of externalities than was done in Chapter 6 of this study. He limits himself to (1) externalities related to strategic complementarities, that arise from the strategic interactions of banks and other financial institutions and agents, and which cause the build- up of vulnerabilities during the expansionary phase of a financial cycle; (2) externalities related to fire sales and credit crunches, that arise from a generalized sell- off of assets causing a decline in asset prices, a deterioration of balance sheets of intermediaries and investors, and a drying up of financing, especially during the contractionary phase of a financial (and business) cycle; and (3) externalities related to interconnectedness, caused by the propagation of shocks from systemic institutions or through financial markets or networks (‘contagion’). The anticipation of bailouts perversely affects the (risk- taking) incentives for SIFIs and other market participants. It introduces a race among institutions to become systemically important, as this lowers the cost of funding and reduces market discipline for creditors of SIFIs, especially the riskiest ones See in detail: Claessens, Ibid. pp. 6– 8. 423. See also regarding that analysis: S. Claessens et al., (2013), Macro- Prudential Policies to Mitigate Financial System Vulnerabilities, Journal of International Money and Finance, Vol. 39, pp. 153– 185. 424. See: T. I. Palley, (2008), Financialization: Why It Is and Why It Matters?, Levy Economics Institute Working Paper Nr. 525. Palley documents that its principal impacts are to (1) elevate the significance of the financial sector relative to the real sector, (2) transfer income from the real sector to the financial sector, and (3) increase income inequality and contribute to wage stagnation. Additionally, there are reasons to believe that financialization may put the economy at risk of debt deflation and prolonged recession. 425. A lot of the differences in definition can be traced back to issues and contes- tation that relate to the demarcation lines and in particular between financialization and commoditization on the one hand and marketability on the other. How does it relate to globalization and neoliberalization? See in detail E. Engelen, M. Konings, and R. Fernandez, (2010), Geographies of Financialization in Disarray: The Dutch Case in Comparative Perspective, Economic Geography, Vol. 86, Issue 1, pp. 53– 73. 426. G. A. Epstein (ed.), (2005), Financialization and the World Economy, Edward Elgar, Cheltenham, p. 3. 427. See for a literature review in this respect: I. Ertürk, J. Froud, S. Johal, A. Leaver, and K. Williams (eds.), (2008), Financialization at Work, Routledge, Abingdon. 428. Or in fact subject. Under neoliberalism humans can be ranked on their ability to produce and consume and are appreciated in social terms based on the 490 Notes

accumulated wealth they have so far produced (Forbes ranking) in their life. Even if it is inherited wealth, the commoditization process does not recognize the difference, as the process is disconnected from every possible judgmental ability. In fact, the accumulated wealth indicator is often used as a proxy for (unproven) qualities in other fields (entrepreneurs becoming politicians) Whose opinion matters more? Those who represent capital or those who possess the better quality argument. It facilitates categorization and the ability to ignore subjects that do not preach free market dynamics, disqualifying them as popu- lists or as marginal in nature. 429. In the USA. See also: R. Greenwood and. Scharfstein, (2012), The Growth of Modern Finance, HBS Working Paper. 430. Source: Haver analytics, Central Banking datasets (2013 numbers). 431. See: C. M. Reinhart and K. Rogoff, (2011), This Time is Different: Eight Centuries of Financial Folly, Princeton University Press, Princeton, NJ; H. Schwartze and L. Seabrooke, (2008), Varieties of Residential Capitalism in the International Political Theory: Old Welfare States and the New Politics of Housing, Comparative European Politics, Vol. 6, pp. 237– 261. 432. See: D. MacKenzie, (2006), An Engine, Not a Camera: How Financial Models Shape Markets, MIT Press, Cambridge, MA. 433. E. Engelen, R. Fernandez, and R. Hendrikse, (2014), How Finance Penetrates its Other: A Cautionary Tale on the Financialization of a Dutch University, Antipode, March, pp. 1– 20. That is quite remarkable given the long- standing tradition of self- managed guild- oriented public funded universities in continental Europe. 434. I- H. Cheng and W. Xiong, (2013), The Financialization of Commodity Markets, NBER Working Paper Series, Nr. 19642. 435. L. Nijs, (2014), Global Agricultural Markets: The Handbook of Land, Water and Soft Commodities, Chapter 16 on Speculation in soft commodity markets, Palgrave Macmillan, London, including a material literature review of the matter. 436. S. R. Isakson, (2013), The Financialization of Food: A Political Economy of the Transformation of Agro- Food Supply Chains, ICAS Review Paper Series Nr. 5; J. Clapp, (2012), The Financialization of Food: Who is Being Fed?, Waterloo University Working Paper, and also J. Clapp, (2013), Financialization, Distance and Global Food Politics, Conference Paper Nr. 5, Food Sovereignty: A Critical Dialogue, September 14– 15. 437. M. C. Taylor, (2011), Financialization of Art, Capitalism and Society, Vol. 6, Issue 2, Article 3, updated in 2013. As well: N. Horowith, (2014), Art of the Deal: Contemporary Art in a Global Financial Market, Princeton University Press, Princeton, NJ, in particular pp. 143– 187. 438. M. Hudson, (2010), The Transition of Industrial Capitalism to a Financialized Bubble Economy, Levy Economics Institute, Working Paper, Nr. 627; G. A. Epstein, (2005), Financialization of the World Economy, Edward Elgar, Cheltenham. 439. A. Sheng, (2013), The End of Financialization, Institute for New Economic Thinking, blog article. 440. S. G. Cecchetti and E. Kharroubi, (2012), Reassessing the Impact of Finance on Growth, BIS Working Papers Series, Nr. 381; C. Lapavitsas, (2014), Profiting Without Producing: How Finance Exploits Us All, Verso, New York and K. Polanyi- Hewitt, (2013), From the Great Transformation to the Great Financialization: On Karl Polanyi and Other Essays, Zed Books, London. Notes 491

441. O˝. Orhangazi, (2008), Financialisation and Capital Accumulation in the Non- Financial Corporate Sector: A Theoretical and Empirical Investigation on the US Economy: 1973– 2003, Cambridge Journal of Economics, Vol. 32, pp. 863– 886. 442. L. Lohman, (2013), Financialization, Commodification and Carbon: The Contradictions of Neoliberal Climate Change, Working Paper. 443. T. I. Palley, (2013), Financialization: The Economics of Finance Capital Domination, Palgrave Macmillan, Basingstoke, pp. 31– 43, passim. 444. D. M. Kotz, T. McDonough, and M. Reich (Eds), (1994), Social Structures of Accumulation: The Political Economy of Growth and Crisis, Cambridge University Press, Cambridge, pp. 45– 47. 445. D. M. Kotz, (2008), Neoliberalism and Financialization, University of Massachusetts Amherst Working Paper. 446. Kotz, Ibid. p. 10. He further illustrates: ‘This is likely the reason why the Rockefellers’ huge fortune, born in oil, was soon shifted to finance and real estate. Chase Manhattan Bank, the Rockefeller bank, was not tied to any particular company or industry’. Regarding workers left assuming the risk, Lin et al. provide compelling evidence to show rising income inequality as a consequence. They argue that the increasing reliance by firms on earnings realized through financial channels decoupled the generation of surplus from production, strengthening owners’ and elite workers’ negotiating power relative to other workers (see T. Piketty (2014), Capital in the 21st Century, Harvard University Press, Cambridge MA regarding the enhanced bargaining power of corporate managers leading to higher salaries rather than higher levels of productivity). Moreover, the financial conception of the firm reduced capital and management commitment to production, further marginalizing labor’s role in US corporations. The result was an incremental exclusion of the general work- force from revenue- generating and compensation- setting processes. They (Lin et al.) further suggest that financialization accounts for more than half of the decline in labor’s share of income during the period 1070– 2008; see K.- H. Lin and D. Tomaskovic- Devey, (2011), Financialization and U.S. Income Inequality, 1970– 2008, University of Massachusetts at Amherst Working Paper and K.- H. Lin and D. Tomaskovic- Devey, (2011), Income Dynamics, Economic Rents and the Financialization of the U.S. Economy, University of Massachusetts at Amherst Working Paper. Similar results for the OECD region were found by: B. Kus, (2013), Financialization and Income Equality in the OECD Region: 1995– 2007, University of Massachusetts at Amherst Working Paper. 447. G. Dumenil and D. Levy, (2005), Costs and Benefits of Neoliberalism, in G. Epstein, (ed.), Financialization and the World Economy, Edward Elgar, Cheltenham and Northampton, p. 19; D. Kotz and T. McDonough, (2008), Global Neoliberalism and the Contemporary Social Structure of Accumulation, in T. McDonough, M. Reich, and D. Kotz (eds.), Understanding Contemporary Capitalism: Social Structure of Accumulation Theory for the Twenty First Century, Cambridge University Press, Cambridge, pp. 73– 83; D. Kotz, (2012), Social Structures of Accumulation, the Rate of Profit, and Economic Crisis, University of Amherst Working Paper and D. Kotz, (2014), The Rise and fall of Neoliberal Capitalism, Harvard University Press, Cambridge, MA, in particular Chapter 4. 448. Financialization also leads to enhanced levels of correlations between different asset classes directly contributing to systemic exposures; See: A. Zaremba, (2013), Implications of Financialization for Strategic Asset Allocation: the Case of Correlations, Poznan University Working Paper. 492 Notes

449. E. Caverzasi, (2014), Minsky and the Sub- Prime Mortgage Crisis: The Financial Instability Hypothesis in the Era of Financialization, Levy Economics Institute, Working Paper Nr. 796. 450. K.- H. Lin and D. Tomaskovic- Devey, (2014), Financialization: Causes, Inequality Consequences, and Policy Implications, University of Amherst Working Paper. 451. Referring to the book written about the Leveraged Buy- Out (LBO) of RJR Nabisco, which has become iconic for predatory capitalism and avarice, see: J. Heylar and B. Burrough, (1989), HarperCollins, New York. 452. When it comes to the reduction of manufacturing in the West the most fre- quent explanations for this decline are productivity gains and increased trade with low- wage economies. Pressures came from the financial markets to offload activities that sustain manufacturing and depleted the manufacturing ecosys- tem. See in detail the MIT Project ‘Production in the Innovative Economy’ and S. Berger, (2014), How Finance Gutted Manufacturing, Boston Review, April 1. 453. A. Demirgüç- Kunt, E. Feyen, and R. Levine, (2011), The Evolving Importance of Banks and Securities Markets, World Bank, Policy Research Working Paper, Nr. 5805. 454. L. Gambacorta, J. Yang, and K. Tsatsaronis, (2014), Financial Structure and Growth, BIS Quarterly Review, March 2014, pp. 21– 35. 455. S. Cecchetti and E. Kharroubi, (2012), Reassessing the Impact of Finance on Growth, BIS Working Papers, Nr. 381. 456. S. Law and N. Singh, (2014), Does Too Much Finance Harm Economic Growth?, Journal of Banking and Finance, Vol. 41, pp. 36– 44. 457. See e.g. on capital controls: C. Saborowski, S. Sanya, H. Weisfeld, and J. Yepez, (2014), Effectiveness of Capital Outflow Restrictions, IMF Working Paper, WP/14/8; Juan Pablo Medina and Jorge Roldós, (2014), Monetary and Macroprudential Policies to Manage Capital Flows, IMF Working Paper, WP/14/30. 458. R. McCauley, P. McGuire, and G. von Peter, (2010), The Architecture of Global Banking: from International to Multinational, BIS Quarterly Review, March 2010, pp. 25– 37; R. De Haas and I. van Lelyveld, (2010), Internal Capital Markets and Lending by Multinational Bank Subsidiaries, Journal of Financial Intermediation, Vol. 19, pp. 1– 25. 459. J. Blouin, H. Huizinga, L. Laeven, and G. Nicodème, (2014), Thin Capitalization Rules and Multinational Firm Capital Structure, IMF Working Paper, WP/14/12. 460. S. Claessens and L. Kodres, (2014), The Regulatory Responses to the Global Financial Crisis: Some Uncomfortable Questions, IMF Working Paper, WP/14/46. 461. T. Tressel and T. Verdier, (2014), Optimal Prudential Regulation of Banks and the Political Economy of Supervision, IMF Working Paper, WP/14/90. Low interest rates lead to enhanced inequality as the affluent hold more equity positions relative to the non- affluent part of society and therefore benefit disproportionately more; see: McKinsey, (2013), QE and Low Interest Rates: Distributional Effects and Risks, Working Paper. 462. R. Mohan and M. Kapur, (2014), Monetary Policy Coordination and the Role of Central banks, IMF Working Paper, WP/14/70. 463. C. Minoiu, C. Kang, V. S. Subrahmanian, and A. Berea, (2014), Does Financial Connectedness Predict Crisis, IMF Working Paper, WP/13/267. 464. L. Laeven, L. Ratnovski, and H. Tong, (2014), Bank Size and Systemic Risk, IMF Staff Discussion Note, SDN/14/04. 465. R. Babihuga and M. Spaltro, (2014), Bank Funding Costs for International Banks, IMF Working Paper, WP/14/71. Notes 493

466. See the findings of an analysis in this matter: J. Viˇnals, C. Pazarbasioglu, J. Surti, A. Narain, M. Erbenova, and J. Chow, (2013), Creating a Safer Financial System: Will the Volcker, Vickers, and Liikanen Structural Measures Help?, IMF Staff Discussion Note, SDN/13/4. 467. N. Xingyuan Che and Y. Shinagawa, (2014), Financial Soundness Indicators and the Characteristics of Financial Cycles, IMF Working Paper, Nr. WP/14/14. 468. Ph. Aghion and E. Kharroubbi, (2013), Cyclical Macroeconomic Policy, Financial Regulation and Economic Growth, BIS Working Paper Nr. 434. 469. A. Pescatori, D. Sandri, and J. Simon, Debt and Growth: Is There a Magic Threshold, IMF Working Paper, Nr. WP/14/34. 470. B. Öztürk and M. Mrkaic, (2014), SMEs’ Access to Finance in the Euro Area: What Helps or Hampers?, IMF Working Paper, Nr. WP/14/78 and N. Klein, (2014), Small and Medium Size Enterprises, Credit Supply Shocks, and Economic Recovery in Europe, IMF Working Paper, Nr. WP/14/98. 471. S. Cevik and K. Teksoz, (2014), Deep Roots of Fiscal Behavior, IMF Working Paper, Nr. WP/14/45. 472. S. G. Cecchetti and E. Kharroubi, (2012), Re- assessing the Impact of Finance on Growth, BIS Working Paper, Nr. 381 and S. G. Cecchetti and E. Kharroubi, (2013), Why Does Financial Sector Growth Crowd Out Real Economic Growth?, BIS Working Paper; S. H. Law and N. Singh, (2013), Does Too Much Finance Harm Economic Growth, Working Paper, they demonstrate similar findings. Cecchetti et al. draw two important conclusions: First, the growth of a country’s financial system is a drag on productivity growth. That is, higher growth in the financial sector reduces real growth. In other words, financial booms are not, in general, growth enhancing, probably because the financial sector competes with the rest of the economy for resources. Second, they examined the distributional nature of this effect and find that credit booms harm what we normally think of as the engines for growth: those that are more R&D- intensive. Their findings point to a pressing need to reassess the relationship of finance and real growth in modern economic systems. 473. S. Dées and J. Güntner, (2014), The International Dimensions of Confidentiality Shocks, ECB Working Paper Series, Nr. 1669. 474. T. Ahnert, (2014), Rollover Risk, Liquidity and Macro- Prudential Regulation, ECB Working Paper Series, Nr. 1667; V. V. Acharya and H. Naqvi, (2012), The Seeds of a Crisis: A Theory of Bank Liquidity and Risk- Taking over the Business Cycle, CEPR Discussion Papers Nr. 8851. 475. BIS, (2014), Review of the Pillar 3 Disclosure Requirements- Consultative Document, June 24. 476. (Capital) Income taxes become problematic the more the economies they cover become open economies, which is the case in terms of globalization as the elasticity of capital income taxes becomes larger as economies become open structured; see: E. Mendoza, L. Tesar and J. Zhang, (2014), Saving Europe: The Unpleasant Arithmetic of Fiscal Austerity in Integrated Economies, NBER Working Paper, Nr. 20200. 477. See in detail also for the quantification of the externalities involved: B. Lockwood, C. Nathanson, and E. G. Weyl, (2014), Taxation and the Allocation of Talent, Harvard University Working Paper. Similar dynamics can be identified with respect to marketing and the negative externalities it causes in terms of overconsumption, pollution and debt; see: S. Steed and H. Kersley, (2014), A Bit Rich: Calculating the Real Value to Society of Different Professions, NEF Working Paper. 494 Notes

478. See for example the application of Pigovian taxes in tourism: C. Piga, (2003), Pigouvian Taxation in Tourism, Environmental and Resource Economics, Vol. 26, pp. 343– 359. 479. See: C. Todd, S. Kallbekken, and S. Kroll, (2011), The Impact of Trial Runs on the Acceptability of Pigouvian Taxes: Experimental Evidence, Cicero Working Paper, Nr. 2011/01. 480. Even domestic applications of Pigovian instruments, despite their natural limitations, have the potential to spur regional or even global applications, given the spillover effects that exist in international taxation; see: IMF Policy Paper, (2014), Spillovers in International Corporate Taxation, May 9. 481. Although the first is still the dominant line of thinking across the political spectrum and at the level of international institutions (EU, IMF, etc.) when judged based on the conditions they imposed on countries receiving emergency funding. 482. See Chapter 2 for details on their individual contributions to the neoliberal program.

7 Conclusions

1. Healthcare costs can be added to his list. 2. A. C. Pigou, (1954), Some Aspects of the Welfare State, Diogenes, Vol. 7, p. 10. 3. G. F. Hegel, (1972), Grundlinien der Philosophie des Rechts, Suhrkamp [1820], Frankfurt am Main, p. 14. 4. W. Schinkel, (2014), Speech during the R. Bregman’s book Presentation ‘Gratis geld voor iedereen. En nog vijf grote ideeën die de wereld kunnen veranderen’, transcript to be found in R. Bregman, (2014), Hoe de revolutionaire hippies van toen de systeembevestigende managers van nu geworden zijn, De Correspondent, September 20. 5. L. Zingales, (2014), Preventing Economist’s Capture, CEPR Discussion Paper, Nr. 9867. He shows that papers whose conclusions are pro- management are more likely to be published in economic journals and more likely to be cited. He also demonstrates that business schools’ faculty write papers that are more pro- management. 6. G. E. Moore, (1993), Principia Ethica, Cambridge University Press, Cambridge [1903], pp. 78– 96. 7. Obviously without a ‘proportionate’ reduction of resources. 8. See in detail Herman De Dijn, (2014), Vloeibare waarden. Politiek, zorg en onderwijs in de laatmoderne tijd, Pelckmans, Kalmthout/Zoetermeer, pp. 14– 28, passim. 9. M. Wolf, (2014), Financial Reform: Call to Arms. Post- Crisis Efforts to Bolster Economies and Create Safer Banks Have Only Preserved a Flawed System, Financial Times, September 3. 10. P. Krugman, (2014), Austerity and the Hapless Left, NY Times Blog, August 29 and P. Krugman, (2014), On the Pathetic Left, NY Times Blog, April 3. 11. L. Huysse, (2014), De democratie voorbij, Van Halewyck, Leuven. 12. With no or no meaningful impact on the absolute indebtedness of European countries. See most recently: Eurostat, (2014), Indicating an Average Indebtedness of 92.7% to GDP (end Q2, 2014), October 23. 13. L. Kaplow and S. Shavell, (1997), On the Superiority of Corrective Taxes to Quantity Regulation, NBER Working Paper, Nr. 6251, in particular pp. 9– 13. 14. See for example Moody Credit Research, (2014), ECB’s TLTROs are Credit Positive for Banks, But are Unlikely to Boost Lending to the Economy, July 10. That Notes 495

position was substantiated by R. Koo, (2014), About the Ineffectiveness of Monetary Expansion, Nomura Research Institute. 15. See for example: R. Dobbs, S. Lund, T. Koller, and A. Shwayder, (2013), QE and Ultra- Low Interest Rates: Distribution Effects and Risks, McKinsey Global Institute Report, November. They demonstrate the impact of the unconventional monetary policy measures and how the impact is non- linear when judging different segments in society. 16. See in extenso: Ph. Wilms, J. Swank, and J. de Haan, (2014), Determinants of the Impact of Real Banking Crises: A Review and New Evidence, DNB Working Paper, Nr. 437. 17. See for example: A. Saika and J. Frost, (2014), How Does Unconventional Monetary Policy Effect Inequality? Evidence from Japan, DNB Working Paper, Nr. 423. Japan has been front- running Europe in terms of using QE (‘Quantitative Easing’) to reflate asset prices and combat deflation in the face of protracted low real economic growth since the early 1990s. A Nipponization of Europe has arrived and has been combated so far with the same instruments that Japan used without proper observation of its (in)direct implications. See about inequality after Piketty: E. Engelen and K. Williams, (2014), Just The Facts: On The Success of Piketty’s Capital, Environment and Planning, Vol. 46, Issue 8, pp. 1771– 1777; W. D. Cohen, (2014), How Quantitative Easing Contributed to the Nation’s Inequality Problem, NY Times Dealbook, October 22. See a contrario: J. Cohen- Setton, (2014), The Distributional Effect of Quantitative Easing, Bruegel.org; O. Coibion, Y. Gorodnichenko, L. Kueng, and J. Silvia, (2014), Innocent Bystanders? Monetary Policy and Inequality in the US, CEPR’s Policy Portal, via voxeu.org; P. Krugman, (2014), Notes on Easy Money and Inequality, NY Times Blog, October 25. 18. N. Klein, (2014), This Changes Everything: Capitalism, Simon & Schuster, New York, pp. 13– 16, passim. 19. I. Parry, C. Veung, and D. Heine, (2014), How Much Carbon Pricing is in Countries’ Own Interest? The Critical Role of Co- Benefits, IMF Working Paper, Nr. WP/14/174. 20. C. L. Baum and C. J. Ruhm, (2014), The Changing Benefits of Early Work Experience, NBER Working Paper, Nr. 20413. They demonstrate that the gains of (early) work experience are largely restricted to women and have diminished over time for them. 21. OECD, (2014), Education at a Glance 2014, OECD Publishing, Paris, which demonstrates not only that educational spending has started to slow in the OECD region, but also quantifies (per OECD country) the deteriorating wage premium for holding a tertiary educational degree, showing material above average deterioration (compared to the OECD average) in The Netherlands and Belgium. 22. B. Stellinga, (2012), Dertig jaar privatisering, verzelfstandiging en marktwerking, Amsterdam University Press, Amsterdam. 23. A. Bowman, M. de la Cuesta, E. Engelen, I. Ertürk, P. Folkman, J. Froud, S. Johal, J. Law, A. Leaver, M. Moran, and K. Williams, (2013), Manifesto for a Foundational Economics, CRESC Working Paper. 24. That regressivity is either explicit or implicit; See in detail: C. Wichman, L. O. Taylor, and R. H. von Haefen, (2014), Conservation Policies: Who Responds to Price and Responds to Prescription?, NBER Working Paper, Nr. 20466. 25. The level of regressivity varies widely depending on the type of Pigovian tax introduced. 26. See the paper already discussed in Chapter 3: M- G Attinasi and A. Klemm, (2014), The Growth Impact of Discretionary Fiscal Policy Measures, ECB Working Paper, Nr. 1697. 496 Notes

27. See in detail : E. Engelen, I. Ertürk, J. Froud, S. Johal, A. Leaver, M. Moran, A. Nilsson, and K. Williams, (2011), After the Great Complacence: Financial Crisis and the Politics of Reform, Oxford University Press, Oxford. 28. Remember that in Chapter 2 it was discussed how (neo)liberalism (and explicitly ordoliberalism, where the rule of law is focused on ensuring that the market could function well, i.e. in complete competition and with all economic freedom possible) was introduced not (only) through economists, but to a large degree through the legal profession and scholars. See on the embedment of (ordo)liberalism in our thinking about regulation particular on the level of the international markets (including the economic integration in the EU), how it changed the state- society relationship (see also Chapter 3 in this study) and how it impact ‘global economic governance and lead to ‘economic constitutionalization’ (‘Wirtschaftsverfassung’): C. Peters, (2014), On the Legitimacy of International Tax Law, IBFD Doctoral Series Nr. 31, IBFD, Amsterdam, pp. 17, 38, 44– 47. 29. Jayasuriya highlights ‘economic constitutionalism refers to the attempt to treat the market as a constitutional order with its own rules, procedures, and institutions that operate to protect the market order from political interference’; see K. Jayasuriya, (2001), Globalization, Sovereignty, and the Rule of Law: From Political to Economic Constitutionalism, Constellations, Vol. 8, Issue 4, who also uses the term global ordoliberalism (p. 452) to separate it from its historical German roots. 30. See C. Joerges, (1997), The Market without the State? The ‘Economic Constitution’ of the European Community and the Rebirth of Regulatory Politics, European Integration Online Papers (EIoP), Vol. 1, Issue 19. It reminds us of the discussion of Foucault in Chapter 3, who at some point lamented: ‘a state under the supervision of the market rather than a market supervised by the state’; see F. Foucault, (2010), M. Foucault, (2010), The Birth of Biopolitics: Lectures at the Collège de France, 1978– 1979, Palgrave Macmillan, New York, 2010 (translation of Naissance de la Biopolitique: Cours au Collège de France, 1978– 1979, Édition du Seuil/Gallimard; trans. Graham Burchell), p. 116. 31. See in detail: Ò. Jordà, M. Schularick, and A. M. Taylor, (2014), The Great Mortgaging: Housing Finance, Crises and Business Cycles, NBER Working Paper, Nr. 20501. 32. See also L. Nijs, (2011), Shaping Tomorrow’s Marketplace: Investment Philosophies for Emerging Markets and a Semi- Globalized World, Euromoney Books, London, pp. 254– 257. 33. P. Tucker, (2014), The Lender of Last Resort and Modern Central Banking: Principles and Reconstruction, Rethinking the Lender of Last Resort, BIS Paper, Nr. 79, pp. 10– 42. 34. Ò. Jordà, M. Schularick, and A. M. Taylor, (2014), The Great Mortgaging: Housing Finance, Crises and Business Cycles, NBER Working Paper, Nr. 20501. 35. They lend in short and out long, covered by real estate collateral pushing the actual investment risk out. Sufi indicates ‘banks have become mortgage production chains. Modern banks are not savy, information collecting business lenders. Instead, they take very leveraged bets on real estate. They borrow short with government subsidized liabilities such as deposits, and they lend long against property assets. They do so with very little equity to cover their losses in case things go wrong. Meanwhile, the very thing that banks are meant to do well – selecting businesses to lend to – so that they can grow, invest, hire employees and boost local economies – has fallen by the wayside.’ See: A. Sufi, (2014), Notes 497

Bernanke’s Failed Mortgage Application Exposes the Flaw in Banking, Financial Times, October 13. 36. A type one credit bubble (for example Sweden in the early 90s) is one that is characterized by falling output levels and which never regain the pre- crisis level, although the growth rate recovers. A type two credit bubble (for example Japan since the 1990s) is one characterized by no absolute fall in output but where potential growth falls, never again reaching its pre- crisis level. See in detail L. Buttiglioni et al., (2014), Deleveraging? What Deleveraging?, International Center for Monetary and Banking Studies (ICMB), Geneva Reports on the World Economy, Nr. 16, CEPR Press, in particular pp. 19– 37. 37. M. Ampudia et al., (2014), Financial Fragility of European Households, ECB Working Paper Series, Nr. 1737. 38. W. Streeck, (2014),The Politics of Public Debt: Neoliberalism, Capitalist Development, and the Restructuring of the State, German Economic Review, Vol. 15, pp. 143– 165. 39. A contemporaneous and visible topic in this respect is the interventionism proclaimed by some but halted by others within the straitjacket of euro- based monetary policies. See for example: C. Bryant, (2014), Berlin Rejects Spending Splurge to Boost Eurozone Recovery, Financial Times, September 9. 40. F. Scharpf, (2013), The Eurocrisis as a Victory of Neoliberalism, in J. Fossum and A. Menéndez (eds.), The European Union in Crises or the European Union as Crises, Arena Report Nr. 2/2014, p. 146. 41. See A. Ghosh et al., (2014), Friedman Redux: External Adjustment and Exchange Rate Flexibility, IMF Working Paper, Nr. WP/14/146. They find a significant and empirically robust relationship between exchange rate flexibility and the speed of external adjustment in a wide variety of countries and economic situations. 42. F. Scharpf, (2013), The Eurocrisis as a Victory of Neoliberalism, in J. Fossum and A. Menéndez (eds.), The European Union in Crises or the European Union as Crises, Arena Report Nr. 2/2014, p. 151. 43. F. W. Scharpf, (2014), After the Crash: A Perspective on Multilevel European Democracy, MPIfG Discussion Paper 14/21. 44. A. Johnston and A. Regan, (2014), European Integration and the Incompatibility of National Varieties of Capitalism: Problems with Institutional Divergence in a Monetary Union, MPIfG Discussion Paper 14/15. 45. M. Höpner and M. Lutter, (2014), One Currency and Many Modes of Wage Formation: Why the Eurozone Is Too Heterogeneous for the Euro, MPIfG Discussion Paper 14/14. 46. W. Streeck and L. Elsässer, (2014), Monetary Disunion: The Domestic Politics of Euroland, MPIfG Discussion Paper 14/17. 47. See in detail: R. Brenner, (2006), The Economics of Global Turbulence: The Advanced Capitalist Economies from Long Boom to Long Downturn 1945– 2005, Verso, London/ New York, in particular pp. 153– 164, 237– 250. 48. F. W. Scharpf, (2014), After the Crash: A Perspective on Multilevel European Democracy, MPIfG Discussion Paper 14/21. 49. F. Scharpf, (2013), The Eurocrisis as a Victory of Neoliberalism, in J. Fossum and A. Menéndez (eds.), The European Union in Crises or the European Union as Crises, Arena Report Nr. 2/2014, pp. 153– 154. 50. In particular the excessive deficit (or imbalance) procedures; see in extenso Chapter 3. 498 Notes

51. F. Scharpf, (2013), The Eurocrisis as a Victory of Neoliberalism, in J. Fossum and A. Menéndez (eds.), The European Union in Crises or the European Union as Crises, Arena Report Nr. 2/2014, pp. 143– 156. 52. See for an illustration of how fear has creeped into the annual folklore of Prince’s Day in The Netherlands, containing an anthology and the re- emergence of fear as an argument defining policy (in 2014: defense spending): R. Wijnberg, Treurrede, De Correspondent, September 17. 53. See initially: W. Streeck, (2011), The Crisis of Democratic Capitalism, New Left Review, Issue 71, pp. 5– 29. 54. F. W. Scharpf, (2014), After the Crash: A Perspective on Multilevel European Democracy, MPIfG Discussion Paper 14/21. 55. W. Streeck, (2014), How will Capitalism End, New Left Review, Vol. 87, pp. 35– 64. 56. Ibid. p. 38. 57. Supported by technocratic institutions such as BIS; See BIS, (2013), 2012– 2013 Annual Report, Enhancing Flexibility: A Key to Growth, in particular Chapter III, Removing the Roadblocks to Growth, pp. 27– 37. This is all in a context where incremental proof is coming to the table that structural reforms, particularly in the labor market, add little to nothing to long- term growth trends; see for example: J. Heyes, (2014), Employment Protection Under Fire: Labour Market Deregulation and Employment in the European Union, Economic and Industrial Democracy, Vol. 35, Issue 4, pp. 587– 607. The contradiction is manifest: I want my laborers cheap and my customers to be rich. 58. W. Streeck, (2014), How will Capitalism End, New Left Review, Vol. 87, p. 40. 59. Ibid. pp. 44– 45. 60. M. Wolf, (2014), The Shifts and the Shocks. What we’ve Learned- and Have Still to Learn From the Financial Crisis, Penguin Press, New York. 61. W. Streeck, (2014), The Politics of Exit: On Peter Mair, Ruling the Void: The Hollowing of Western Democracy, New Left Review, Vol. 88, pp. 121– 129. 62. See in extenso Chapter 3. P. Mair, (2013), Ruling the Void: The Hollowing of Western Democracy, Verso, London and New York, Introduction. 63. W. Streeck, (2014), How Will Capitalism End, New Left Review, Vol. 87, p. 47. He finishes with ‘Eventually, the myriad provisional fixes devised for short- term crisis management will collapse under the weight of the daily disasters produced by a social order in profound, anomic disarray’. For a rather anecdotal review of the current state of affairs see G. Packer, (2014), The Unwinding: An Inner History of the New America, Farrar, Straus & Giroux, New York. 64. K. Polanyi, (1957), The Great Transformation: The Political and Economic Origins of Our Time [1944], Beacon Press, Boston, pp. 68– 76. The three fictitious commodities (labor, land, and money) have now been eroded. 65. C. B. MacPherson, (1962), The Political Theory of Possessive Individualism: Hobbes to Locke, Oxford University Press, Oxford, pp. 4– 13, passim. 66. A comparison with the Titanic might work here. Huge, with new technologies and indestructible, its weakness was in the absence of material waterproof com- partments that caused a relatively small breach to flood the entire ship and cause its demise. A global marketplace has an inclination to respond to everything the media throws at it and causes widespread turbulence, even when this is trivial or purely noise. That momentum will accelerate when the interconnection and therefore the contagion multiplier intensifies. There will be a need to counterbal- ance that movement with adequate instruments that will allow a softening of the response of the marketplace, acting as a buffer. Command- and- control legislation Notes 499

forces economic agents to comply, but fails to make economic agents alter their business models and conduct themselves in a way that will strengthen the industry structure and thereby the marketplace. 67. It has already been indicated in the introduction that this study would not include a quantitative or econometric analysis of the (possible) budget neutrality of a portfolio of Pigovian taxes. Besides the lack of some datasets, that answer will largely depend on the choice of which Pigovian taxes to include in the portfolio. I also indicated in the introduction that my shallow assessment indicates that budget neutrality should not be particularly difficult to achieve. Just the simple fact that the cost of one liter of oil (or derived products) would cost about US$11 (see Sections 4.7.3. and 4.7.4), including the cost of externalities, leads to the following conclusion. The Netherlands consumes about 990,000 barrels of oil per day (IEA dataset 2013). A barrel consists of approximately 160 liters of oil (158.98 liters to be precise). With 365 days a year that would lead to a revenue source of approx. US$57.5 billion per year in The Netherlands based only on this externality. This can be benchmarked against the €139.4 billion in fiscal revenues for 2013. 68. That is on a theoretical level and within the parameters defined and given the many qualifications provided throughout the study. Those general conclusions might contradict the findings of certain Pigovian portfolios or individual Pigovian instruments. As highlighted in the introduction, it was the econometric testing, or back- testing, of a specific (catalog of) Pigovian instruments that I defined as out of scope regarding this study. 69. See for example: A. Cesa- Bianchi and A. Rebucci, (2013), Does Easing Monetary Policy Increase Financial Instability, John Hopkins University Working Paper. 70. See R. C. Koo, (2014), The Escape from Balance Sheet Recession and the QE ‘Trap’, Nomura Research, November. S. Claessens, S. Ghosh, and R. Mihet, (2014), Macro- Prudential Policies to Mitigate Financial System Vulnerabilities, IMF Working Paper, WP/14/155. They find that measures aimed at borrowers – caps on debt- to- income and loan- to- value ratios – and at financial institutions – limits on credit growth and foreign currency lending – are effective in reducing asset growth. Countercyclical buffers have little effect through the cycle, and some measures are even counterpro- ductive during downswings. See in general: A. S. Blinder, (2014), What Did We Learn from the Financial Crisis, the Great Recession and the Pathetic Recovery, Princeton University Working Paper, Nr. 243. 71. A. M. Warner, (2014), Public Investment as an Engine of Growth, IMF Working Paper, Nr. WP/14/148. ‘On average the evidence shows only a weak positive association between investment spending and growth, and only in the same year, as lagged impacts are not significant. Furthermore, there is little evidence of long- term positive impacts. The fact that the positive association is largely instan- taneous argues for the importance of either reverse causality, as capital spending tends to be cut in slumps and increased in booms, or Keynesian demand effects, as spending boosts output in the short run. It argues against the importance of long- term productivity effects, as these are triggered by the completed investments (which take several years) and not by the mere spending on the investments. In fact, a slump in growth rather than a boom has followed many public capital drives of the past. Nevertheless, public investments in infrastructure yield positive effects of infrastructure development on ‘income growth and, more tentatively, on distributive equity’. Still, the precise mechanisms through which 500 Notes

these effects accrue, and their full impact on welfare, remain relatively unex- plored’; see in detail: C. Calderon and L. Serven, (2014), Infrastructure, Growth, and Inequality: An Overview, World Bank Policy Research Working Paper, Nr. WPS 7034. 72. M. Eberhardt and A. Presbitero, (2013), This Time They are Different. Heterogeneity and Nonlinearity in the Relationship between Debt and Growth, IMF Working Paper, Nr. WP/13/248. The evidence with respect to the relationship between public debt levels and economic growth has been studied extensively, with mixed results. The relationship between private debt levels and economic growth has been studied far less. Nevertheless, they are equally if not more important to understand the optimal sovereign measures to be taken. 73. D. Anginer, A. Demirguc- Kunt, H. Huizinga, and K. Ma, (2014), Corporate Governance and Bank Insolvency Risk: International Evidence, World Bank Policy Research Working Paper, Nr. WPS 7017. This paper finds that shareholder- friendly corporate governance is positively associated with bank insolvency risk using a number of matrices. 74. M. Nussbaum, (2013), Creating Capabilities: The Human Development Approach, Belknap Press (HUP), Cambridge, MA, pp. 4– 5, passim. 75. W. Weyns et al. (eds.), (2013), Marktisme: Kritiek op het berekenende samenleven, Pelckmans, Kalmthout, pp. 121– 134, passim. 76. A. Margalit, (1998), The Decent Society, Harvard University Press, Cambridge, MA, pp. 12– 32, passim. A decent society, in Margalit’s view, is a society whose institutions do not humiliate its members. 77. D. Marquand, (2014), Mammon’s Kingdom: An Essay on Britain, Allen Lane, London, pp. 14– 25, passim. 78. M. Lazzarato, (2012), The Making of the Indebted Man: An Essay on the Neoliberal Condition, Semiotext(e), trans. J. D. Jordan, Los Angeles, CA, p. 8. 79. Ibid. pp. 70– 71. ‘The world must contain indeterminacy, an open temporality in the process of realizing itself, that is, a ‘present’ which encompasses possible alternatives, and, thus, possibilities of choice and existential risks. It is these possibilities and the unpredictable alternatives that debt seeks to neutralize’. 80. Lazzarato continues: ‘Indeed, debt becomes something like original sin in that it is acquired through inheritance. One is born in debt, and through the process of constant evaluation (pp. 137– 145), the subjectivity of the indebted man (homo debitor) is constructed and projected to infinity. The morality of debt entails the construction of memory, guilt, fear and bad conscience in the economic subject, the entrepreneur of the self’. The entrepreneur of the self is the embodiment of the ‘subjective economy’. Gullì comments: ‘What characterizes that figure is infinite debt: infinite work, infinite effort and striving for the mere aim of escap- ing bare life, whose only horizon is death – a life of debt that ends only in and with death. The politics of subjection, typical of the neoliberal economy, has a biopolitical and thanatopolitical meaning, namely, the right of life and death that power (of the sovereign, disciplinary, or pastoral kind) has over everybody; see B. Gullì, (2013), A Second Innocence: Deactivating the Debt Machine, Reviews in Cultural Theory, Vol. 4, Issue 2, Online through reviewsinculture.com. 81. M. Lazzarato, (2012), The Making of the Indebted Man: An Essay on the Neoliberal Condition, Semiotext(e), trans. J. D. Jordan, Los Angeles, CA, p. 46. 82. Ibid. p. 125. Referring back to Foucault who identified three modes of power (in his Birth of Biopolitics): sovereign, disciplinary, and biopolitical power, the question can be raised whether all these forms of power are not instances and Notes 501

mutations of the same original sovereign power. The answer is very likely positive, as Lazzarato concurs. 83. M. C. Nussbaum, (2013), Political Emotions: Why Love Matters for Justice, Belknap Press (HUP), Cambridge, MA, pp. 23– 42, passim. 84. N. Chomsky, (1967), The Responsibility of Intellectuals, The New York Review of Books, February 23, online via Chomsky.info. 85. R. Schumann, (1840), Liederkreis, Op. 24, V. Schöne Wiege meiner Leiden, in fine. It includes the message and ambition to have avoided ending up in the situation that made him become as miserable as he now is. Index

ability-to-pay principle, 9, 153–4, 161, Baumol, W. J., 161–2, 169–70, 184–7, 194–5, 197, 244, 248, 333, 184, 186, 202, 207 359n146 BEPS (Base Erosion and Profit Shifting) ‘absolute’ freedom, 21 initiative of OECD, 5 absolute priority, 26 Berlin, I., 94 accountability of nation-states, 2 black-coded tax law, 17 adaptionism, 110 Bodin, J., 83–4 addictogenic society, 111 Bourdieu, P., 105 Adorno, T. W., 124 Bovenberg, A., 177–9 alcohol businesses, 160 Bowman, A., 214 Alexy, R., 146–7 Bretton Woods system, 47 alternative taxation model, 139 Brown, W., 66–7, 367n248 American Central Bank (FED), 256 Buchanan, J., 54, 118, 162, 168, 202, Anglo-Saxon labor market model, 104 417n119 Arab Spring, 382n163 budget neutrality, 10, 176, 180, 332, Arrow, K., 53 499n67 asset-backed securities (ABSs), 308 ‘Austerität als fiskalpolitisches Regime’, 126 cap-and-trade models, 169, 171, 200 austerity measures, 3–4 for CO2 emission, 158 Austrian School of mathematical capital and liquidity regulation, 257 models, 32 capitalism, 5, 26, 33–4, 43, 53, 68–9, 108, 110, 114, 126–8, 138, 154, backstops, 303 229, 312, 320, 330–1, 340, 342, Bajona, C., 240 369n265, 416n101 balanced and non-disruptive capital 19th century, 387n234 flows, 315–16 capitalist referee, 64 balanced budget rule, 395n333 capital regulation, 300 Bank for International Capital Requirements Directive (CRD I), Settlements (BIS), 253 455n14 banking sector, 255–7 Carlton, D. W., 175 bank stock prices, 471n201 catallaxy, 55, 210–11 bank taxation models and expected Central Clearing party (CCP), 290 outcome, 265–9 central freedom concept, 22 externality-causing activities, 262 Chicago School, 28–9, 32, 351n44, shadow, 301–12 353n65 see also financial sector Chou, W.- L., 179 Barnett, A. H., 201 Christian-democratic welfare states, 78 Basel rules (I, II and III), 253–6, 278, Christian natural law, 23 287, 454n6 citizenship, 63, 78, 90–1, 104 externalities and their treatment civic republican conception of liberty or under, 284–5 freedom, 91 minimum capital requirements, 286 Claessens, S., 302 Batchelder, R., 202 classical liberalism, 27–34, 43 Bauman, Z., 95–6, 379n125 common law approach, 30–1

502 Index 503

concept of freedom in, 29–30 Dave Camp’s tax reform legislation, individual freedom in, 27–30 433n277 nation-state in, 32–3 Davies, W., 52–3, 362n179 right of ownership and possession deadweight loss, concept of, 181–4 in, 30 ‘Death-of-God Atheism,’ 438n324 state and the rule of law in, 28 debt accumulation, 313–14 classical neoliberalism, 45–7 Decreus, T., 117–18 Coase, B., 167–8, 200, 202 de-democratization of the state, 67 Coase Theorem, 167–8, 209, 212 de-individualization, 105 market-based solution, 168–9 democracy in neoliberal state, dynamics Cochrane, J., 299–300 of, 114–36 collateral lending, 310–11 aristocratic democracy, 116 collateral mining, 308 concept of end-capitalism collateral movements and (‘Spätkapitalismus’), 124 valuation, 308 conflict between capitalism and command-and-control regulation, 16, democracy, 126–8 252, 258, 269, 279, 284–5, 291, electorate-based, 118 307, 318, 329 financial or economic crisis and commoditization of human, 319, 327, austerity impacts, 126–8 337, 341 ‘homo economicus’ model, 118–19 common corporate consolidated tax implications of EMU 2.0 membership, base (CCCTB), 223–4 121–5 communicative capitalism, 108 implications of EU membership, Communism, 32 119–21 congestion charges, 193 input/output legitimacy of EU, consumerism, 102 128–36 controlled freedom, 103–6 institutions representing conventionalization of social life, democracy, 115 390n271 issue of legitimacy in Europe, 125–8 Convention for the Protection of of output and throughput Human Rights and Fundamental legitimacy, 122 Freedoms, 140 parliamentary democracies, 115 Cordato, R., 210–11 problems, 116–19 corpocracy, 96, 100, 320, 380n142 Rancière’s views, 115–16 corporate capitalism, 320–1 18th century, 117 corporate income tax system, 15, 145, democratic chronic fatigue 155, 178, 182, 194–5, 258, 266–7, syndrome, 97 273–4, 413n97, 444n7, 455n18, democratic decision-making 461n95 system, 305 see also income tax-based systems; democratic sovereign, 108–14 Pigovian tax model; tax system de Mooij, R. A., 174, 177–9 credit booms and busts, managing, depoliticization of society, 103–4 313–15 deposit insurance system, 7 credit creation function, 313 deregulated global market, 6–7 credit (risk) transformation, 285–7 deregulation, 6, 43, 47–8, 51–2, 59, 104, Crouch, C., 29 136, 251, 258, 316, 320, 324, 328, 341, 343 Dahrendorf, R., 92–3 deregulation-individualization, 99 dark pools, 301, 481n309 ‘different’ state, 10 ‘Dasein’ of an individual, 112 distortionary effect, of externalities, 6–7 504 Index distributive justice, 169, 359n145 Epstein, R. A., 32, 353n64 dogmatic market fundamentalism, 103, ‘equality before and generality of the 382n159 law,’ 47 double dividend hypothesis, EU, 339–41 176–81, 185 code of conduct for business employment model, 181 taxation, 145 on environmental taxes, 176–7 competences of, 119–20, 393n318–20 ex ante situation, 177 direct taxation matters, 143–6 ex post situation, 178 ECJ powers, 142–3 strong model, 181 federalism in, 142 weak model, 181 financial transaction tax, 261 DTTs (Double Taxation Treaties), 14 ‘free movement’ principles, 144 Dutch bank tax, 259–61 function-sovereignty of, 142–3 involvement in tax competition, 145 eco-industry, 174 legal orders, 143 economic calculation problem, 55 membership, democracy implications economic development of, 119–21 anchors of regional, 225–7 restrictions regarding the free trade of deeper economic integration in goods, 144 EU, 227–8 tax systems, 142–8, 261 level of economic integration or European Central Bank (‘ECB’), 121 economic heterogeneity, factors European Court of Justice (ECJ), 142–4 determining, 228–30 involvement in direct tax matters, measuring economic integration, 230–1 146–7 economic efficiency, 210–11 European financial transaction tax, economic equilibrium, 196 258, 261 economic impact of taxation, 14 European Stability Mechanism, 121 egalitarianism, 20 European Trading System (ETS), eigen-pair, 278, 467n168 439n343 eigen-value, 467n168 euro zone countries, 121 eigenvector-centrality (EVC) measures, ex ante insurance premium, 259 278, 467n168 ex ante macro-prudential policies, EIP (Excessive Imbalance Procedure) 316–17 technique, 132, 401n411 ex ante measures, 177, 190, 291, emerging markets, 1 307, 310, 312, 316, 330 ‘growth,’ ‘transitional,’ and insurance premium, 259 ‘converting’ markets, 347n1 internalization of externalities, 283 emissions taxes, 160, 164, 168, 171, investment strategy, 276 174–6, 194, 418n126, 424n184 risk management protocols, 262 employee-to-GDP compensation, 195 tax, 272, 275, 314 EMU 2.0 membership, democracy welfare ex ante, 210 implications of, 121–5 exchange traded funds (ETFs), 301, Engelen, E., 96, 118–19 480n304 Enlightenment period, liberalism in, 20n4 ex post interventions, 264, 267–9, 283 entrepreneurship, 29 externalities, 6–7, 10, 159, 309, environmental taxes, 138, 150, 164, 489n422 176, 247, 453n128 activity or behavior that triggers, excise tax on chlorofluorocarbons 242–3 (CFCs), 192 case of a negative, 160 Lindahl effect in, 410n57 cataloging of, 202–6 Index 505

concept of, 188–97 2011 bailouts of the GIIPS, defined, 158 consequence of, 129 ex post intervention of, 264, 267 Basel III rules and, 254–5 in financial sector, 262–5 European response to, 130 historical evolution, 207–9 financial crisis of 2008, 126–7, 212, inframarginal, 206 254, 277, 302 judiciary and inequality of bargaining impact on EU, 135 power, 200–1 financial sector, 253–5 leverage-induced, 297–301 Basel rules and, 253–5 market failure and, 175 capital requirements of a bank, 253 negative, 14, 117, 151, 154, 158, 162, externalities in, 262–5 193, 197–8, 202, 209, 268, 270, 277, in a globalizing world, 336–9 287, 312, 316, 418n124 market agents and intermediaries, neoliberal approach to, 207–13 activities of, 275, 466n147 neutralizing, 160–1 option to address market failures, 264 positional, 206 possibilities to improve stability positive, 206 in, 263 pricing of, 197–9 risk management, 254 reciprocal nature of, 167–71, 202 tax perspective, 257–61 technological, 206 vulnerability of financial markets, volatility-inducing, 301 466n146 see also Pigovian tax model see also financial institutions (FI) financial transaction tax, 269–71 factor abundance, 235 financial transaction tax (FTT), 199 ‘factor-endowment’ theory, see firm-specific risks, 282 Heckscher–Ohlin (H–O) model fiscal taxes, 183–4 factor intensity, 235 Fleischer, V., 164, 191–2, 194, 298 factor-price equalization theorem, 238 food taxes, 192–3 fear and sovereignty, 98–100, 123 Fordism, 106, 379n125 financial activities tax, 263, 459n69 foreign-owned firms, 2, 347n3 Financial Activities Tax (FAT), 272 Foucault’s concept of ‘governmentalité,’ financial institutions (FI), 251–2, 257, 63, 105–6 259, 278, 305, 328 Frank, R. H., 159 build-up of a proprietary Pigovian freedom, 34, 114 instrument for, 281–2 ‘absolute,’ 21 driven Pigovian tax model, 268 and capital, 103 EVC-dominant, 279 central, 22 involvement in risky transactions, 267 and consumerism, 102 liquidity exposure in, 292–7 controlled, 103–6 regulatory infrastructure, 257 in a democratic context, 113 risk transformation by, 289–92 economic, 22–3 specific role in economy and individual, 21 society, 267 neoliberal, 100–3, 107–8, 329 taxation mechanism, 277–83 neoliberal conception of, 53–5 taxing firm-specific risk in, 284–301 positive and negative, 29, 43, 88–9 see also financial sector reduction of, 113 financialization, 57–8, 307 ‘relative,’ 21 as neoliberal tool, 318–22 as a result of free market forces, 107–8 financial or economic crisis and undercapitalization of society, austerity measures and, 128 102–3 506 Index free market, 3, 10, 19, 40, 94, 101, 216 Hayek, F., 35–7, 44–5, 49, 208, 211–12, as a form of social organization, 64 327, 422n170 globalization of, 117 belief in liberty and individual modern, 64 freedom, 46 nature of, 63 catallaxy, 55 for optimal functioning of concept of neoliberalism, 56 democracy, 116 on free market, 116 private property rights and, 117 of human nature, 54 role of state, 106 information flow concept, 55 state interventionism in, 64 liberal system of law, 46 free society, 54–5 Road to Serfdom, 36 Freiburger Schule, 28, n35 on the rule of law, 47 ‘Freie Wirtschaft, starker Staat’ ‘set of traditions,’ 46 (Free Economy, Strong State), 69 on state coercion, 46 Friedman, Milton, 32, 37, 49, 64, 185 on tax system, 47 contributions to neoliberalism, understanding of liberty, 46 366n238 Heckscher–Ohlin (H–O) model, 15, Fullerton, D., 178–9, 201 224–5, 337, 343, 449n85, 450n90 function-sovereignty, 141–5, 407n22 from an ‘externality’ point of view, of EU, 142–3 247–8 Furedi, F., 113 assumptions of, 234–6 capital and labor factors, 236 GATT, 140 capital in, 450n92 general collateral (GC) repos, 308 in the context of Pigovian taxes, general public interest, 5, 7 242–7 German Civil Code, 68 criticism of, 238–9 German neoliberalism, 44, 65 demand factors, 237 Glass–Steagall Act, 255 equilibrium model, 236 global consumption, 1 in explaining comparative global financial crisis, 2008, 3 advantage, 237 globalization, 1–2, 58–9, 251, 343 factor endowments, 235–6 of capital flows, 299 fundamentals and mechanics, 232–41 national states, impact on, 12 general equilibrium of, 237 negative aspect of, 3 general evaluation of, 241 neoliberalism and, 5–8 impact of globalization, 241 ‘real and effective’ changes and, 3 mechanisms of, 236–41 rule of law and, 7–8 policy implications and opportunities, tax implications of, 4–5 248–9 globalization dynamics, 86–7 with respect to factor Goulder, L. H., 173, 178 endowment, 235 Greenspan, Alan, 256 Ricardo’s comparative advantage ‘growth,’ ‘transitional,’ and ‘converting’ and, 233–4 markets, 347n1 in terms of ‘factor intensity’ and Gründerkrise’, 68 ‘factor abundance,’ 235 Heckscher–Ohlin–Samuelson model, Habermas, J., 63, 127, 131, 196 249, 452n119 Hardt, M., 106 Heckscher–Ohlin theory, 11, 237 harm principle, 30, 351n48 Heckscher–Ohlin–Vanek paradigm, Harvey, D., 66 239–40 Index 507 high-frequency and/or algorithmic Kirzner, I. M., 209–10 trading, 301 knowledge/power construct, 105 High Quality Liquid Assets (HQLA), 292 Kohn, R. E., 175–6 Hobbes, T., 83–4 Kompetenz-Kompetenz, concept of, 140, Höpner, M., 126 142–4, 339 Huang, C.- H., 179 Korinek, A., 314, 316 human rights, 21–3, 140 Kreamer, J., 316 relationship between natural law and, 23–4 labor–capital relationship, 48, 104, 331 ideology, 25–6 laissez-faire capitalism, 33–4 imaginary markets, 66 laissez-faire liberalism, 28, 44–5, 327 implicit guarantees, 278 Laroisière Committee, 265 implicit subsidies, 278 Lasalle, Ferdinand, 42 impossibility theorem, 53–4 learning agility, 380n129 income tax-based systems, 153–6, 194, legal positivism, 39 197, 266 legitimacy, validation of, 125–8 corporate, 15, 145, 155, 178, 182, lender of last resort (LOLR), 286, 338, 194–5, 258, 266–7, 273–4, 413n97, 472n212, 477n270 444n7, 455n18, 461n95 Lesage, D., 62 see also tax systems leverage-induced externalities, 297–301 income tax systems, 9 ‘Leviathan’ state, 51, 361n177 individual freedom, 21 liberal freedom, 107 in classical liberalism, 27–30 liberalism, 90 liberal concept of, 89–92 categorizations, 24–7 reduction of, 113 classical, 27–34 role of state in contributing, 87–114 conception of citizenship, 90 in social liberalism, 34 constituting principles and (soft) in utilitarianism, 352n50 demarcation lines, 20–4 individualism, 20, 35, 109, 437n319 Dahrendorf’s views, 92 individualization, 103 demarcation lines between political inframarginal externalities, 206 and economic, 22–3 instrumentalism of tax legislation, and natural law, 23 150–3 origin, 20 invisible hand principle, 47, 64–5, philosophy, ideology, and theory, 103, 166 25–6 Isenbaert, M., 141 positioning, 43–62 ‘progressive’ vs ‘conservative,’ 23 Jacobs, B., 174 resource allocation in, 23 Jeanne, O., 314 social, 34–7 Jones, D., 49–50 vs neoliberalism, 11–12, 52, 67–71 ‘justice as fairness’ concept, 36 libertarian free will, 90 libertarianism, 37–43, 355n86 Kavelaars, P., 259–60 categories, 37 Keynes, J. M., 161 concept of freedom, 89–92, 107 Keynesianism, 47–8 conditions for, 39 Keynesian-adjusted neoliberal policy in contemporary terms, 38 model, 133 dealing with disputes and conflicts, 38 Keynesian revolution, 44 and free market, 40 508 Index libertarianism – continued Markose, S. M., 277–81, 310, 337 hardliners vs Nozick’s claim of state, 40 economic model, 278–81 and justification of taxation, 40–1 prices, 279 legal system (rule of law), 42 Marshall, Alfred, 158 libertarian principles of fairness, 41, Marshall, T. H., 98 356n106 Marx, K., 117 philosophical principle of, 41 maturity (or duration) risk principles of fairness, 41 transformation, 287–9 Rand’s libertarian views, 42, maturity risk, 260 357n111 McCarthy, M., 48 role of state, 38–9 melioristic, 20 trends in, 39–40 Menger, Carl, 75 understanding of rights, 41 Metcalf, G. E., 179, 201 Liikanen Committee, 265 Mill, John Stuart, 34–5 Lindahl equilibrium, 410n57 harm principle, 351n48 Linder hypothesis, 238 Mills, T., 52, n179 Lippmann, Walter, 44 minarchism, 42 liquidity coverage ratio (LCR), 292–4 Minsky paradox of instability, 279 liquidity regulation, 296–7 minus zero sum game, 212 liquidity risk, 254, 282, 294–6 Mirowski, P., 50 Liquid Modernity, 95–6 modern state, 37 Lisbon strategy, 2000–2010, 381n143 welfare, 379n123 Lisbon Treaty, 132 money market funds (MMFs), 260, 287, Loury, G. C., 175 308, 457n43 Lyotard, J.-F., 95 Mont Pelerin Society, 45, 49, 54 morality and values of market, 10 Maastricht Treaty, 122 multi-agent financial network (MAFN), Mack, E., 41 277, 279 macro-economic risk, 309 multifocal perspective of tax system, 16 macro-prudential policy, 277, 280, 300, 317–18, 474n244 Nash, John, 53 Mair, P., 125, 219, 342 Nash equilibrium, 54 Mandeville, Bernard de, 108 nation-sovereigns, 141 Mankiw, N. G., 161 nation-state manufactured infrastructures, 93 development of, 77–87 marginal cost of public funds (MCF), in 21st century, 86–7 173, 185, 431n252 nation-state-driven sovereignty, 13–14 marginal environmental natural law, 23 damage (MED), 173 natural rights, 23–4 marginal expected shortfall (MES), 280 negative externalities, 14, 117, 151, marginal social costs, 189–91 154, 158, 162, 193, 197–8, 202, distribution of, 191–7 209, 268, 270, 277, 287, 312, marginal social damage (MSD), 179 316, 418n124 margin-based investing, 301, 480n308 negative freedom, 29, 43, 88, 92, 98, market-based liberalism, 50 327, 376n80 market fundamentalism of Negri, A., 106 1970s/80s, 48 nemo dat quod non habet (nemo dat) market individualism, 327 principle, 311, 486n389 market–individual relationship, 57 neoliberal ‘ dog-eat-dog’ principle, market sovereignty, 117 384n191 Index 509 neoliberal freedom, 100–3, 113, 115, 329 and social democracy, 61 characterization of, 107–8 and social structures, 105 neoliberal free market, 214, 312, 331 stages in the emergence of, 47–53 neoliberal individuals, 108–14, 117, 327 state-managed transition, 48–9 Pigovian taxes and, 213–16 state vs free market, 62–7 neoliberalism, 5–8, 27, 109, 326, 343–4 Treanor’s view, 56 abuse of the term, 43 neoliberal project, 51, 58, 364n210 banking sector and, 255–7 neoliberal state, 60 Brown’s view, 66–7, 367n248 concept of freedom in, 94–8 classical, 45–7 future dynamics of democracy in, conception of freedom, 53–5 114–36 constitutionalism of disciplinary, 61 governing of, 124 contemporary and ideology-less and neoliberal freedom, 100–3 position of, 60 neoliberal state-market, 327 in contemporary thinking, 43 neo-republicanism, 91, 377n95 dealing with society, 52 net stable funding ratios, 475n248 defined, 45 neutrality-seeking instrument, 16 and democratic sovereign, 108–14 Nichols, A. L., 190 discursive politics of, 62–3 Nicodeme, G., 182 and entrepreneurship, 29 night-watchman state, 40, 42 evaluation of, 55–62 nihilism, 110 evolved definition of, 60 nomocracy, 73–4 as a facilitator, 114 non-core bank liability ratio, 299 features of, 45 non-linear harm, 171 financialization tool, 318–22 normative theory of the state, 32, Foucault’s view, 105–6 353n64 German neoliberals, 44 Nozick, R., 38, 40–2, 356n106 Harvey’s analysis, 66 Anarchy, State, and Utopia, 40 Hayek’s view, 55 ‘night-watchman state theorem,’ 40 historical dimensions, 44–5 inclusiveness dynamics of, 104 Oakeshott, Michael, 71 ‘knowledge problem’ of principle of ‘universitas,’ 97 neoliberals, 208 Oates, W., 170, 186 vs liberalism, 11–12, 52, 67–71 objectivism, 42 Lippmann definition of, 60 Occupy Wall Street movement, 379n123 mainstream contemporary use of OECD, 1, 195 term, 45 BEPS (Base Erosion and Profit Shifting) market processes in, 57 initiative of, 5 1920s–1950s, 49 oil shock (1973), 47 1950s–1980s, 49 one-party state principle, 19n1 1970s, 47–8 operating leverage, 297 period after 1980, 49 optimal labor income taxation, 183 political strategies of, 53 optimal ‘savoir vivre’, 112 purpose of, 51–2 optimal state, concept of, 25, 92 relationship between the state and the optimal tax system, 173–4, 183 market, 106, 109 ordoliberalism, 28, 44 and rule of law, 71–6 markets in, 28–9 schism between neoliberal political ordoliberal economic framework, 28 philosophy and neoliberal policy Outright Monetary Transactions and ideology, 51, 369n271 (OMT), 133 510 Index over-the-counter (OTC) derivatives, critiques of, 162–74 277, 292 deadweight loss vs economic growth, ownership, 88, 108, 116, 188, 311, 181–4 321, 330 effects in the short term vs long term of factors of production, 237 of, 175–81 gas and car, 221 European Emission Trading System home ownership, 196–7, 206, 266 and, 171 rights of ‘citizens,’ 83–4, 88, 153, ‘excess burden,’ case of, 173 168, 201 externalities in, 165–7 FI-driven, 268 paleo-liberalism, 43, 69–70, 357n121 for financial industry, 268, 273–301 A Theory of Justice, 36, 40 in a globalizing world, 336–9 Pareto improvement, 191 impact of a tax-impacted market on Pareto optimum, 181, 184, 191, 207, other markets, 171–2 213, 329 impact on externalities, 161–2, 208, participative society, 97 463n110 Peace of Westphalia (1648), 79 implications and opportunities, 248–9 pendulum movement between market longevity aspect, 175–6 and state, 10 as a macro-prudential tool, 312–18 Perotti, E., 293–6 market-based instruments, 170–1 Pigou, Arthur, 158 measurement aspect, 162–5 bi-polar ‘industrialist versus society’ mechanism for capturing externalities paradigm, 159–60 based on a cause/harm heterogenic tax levied on the producer, model, 245–7 need for, 160 neoliberal individual and, 213–16 see also Pigovian tax model optimal tax, 173 Pigovian carbon tax, 191–2 optimum Pigovian tax level, 162 Pigovian credits, 196, 244 Pigou’s original position and its Pigovian instruments, 16, 264, 281, 286, evolution, 159–62 310, 313, 329–30, 332–3 Pigovian solution, 162 Pigovian revenues, 172, 180 position of ‘non-linear harm,’ 171 Pigovian subsidies, 197 reciprocity and individual property Pigovian surcharge, 291–2 rights, 167–71 Pigovian tax model, 9–11, 14–16, 18, relationship between Pigovian taxes 145, 156–88, 197, 199–200, 220–5, and instrumentalism, 152–3 251–2, 265, 298–9, 326, 328–36, 343 sensitivity of Pigovian tax, 164 ability-to-pay principle and, 161, in shadow banking sector, 301–12 184–7 social costs, 163–6 alternatives to and derivatives of, specific vs general balance analysis, 199–202 171–4 of bank levies, 269–73 taxation on CO2, 158, 248–9 based on economic behavior and tax credits or exemptions, 187–8 social harm, 244, 248–9 uniform lump-sum taxes, 174 based on social harm, 193–4 see also externalities benefits, 158 Piketty, T., 183, 195 cataloging of externalities, 202–6 Plassmann, F., 198 catalog of, 203–5 political ideology, 25–6 command-and-control regulation, political power, 63 quantity regulation, 169–70, 203 political rights, 99 criteria for legitimizing taxes, 247–8 positional externalities, 206 Index 511 positive freedom, 29, 43, 88–9, 92, 94–5, samenredzaamheid, 101, 116, 381n147 107, 376n80, 379n123 Sartre, J. P., 108 positive law, 30 Schackelford, D. A., 269 pre-nation states, 78 Schäfer, A., 126 prioritization, 26 Scharpf, F. W., 129–31, 135–6, 340 prisonfare, 361n177 Schumpeter, J., 161 privatization, 5–6, 43, 45, 47, 51–2, 59, secular stagnation, 58, 364n214 61, 104, 122, 136, 331 securities lending market, 307–10 profit maximization, 112, 337 securitization, 304–7 pure libertarian hedonic freedom self-determination, 88–9 concept, 107 self-interest, 30 pure wealth tax, 195 semi-globalization of societies, 12–13 shadow banking sector, 301–12 Rancière, J., 115–16 backstops in, 303–4 RAND’s rational choice theory, 54 collateral lending, 310–11 rationality, 29, 34–5, 63, 65, 67, 105, credit (risk) transformation, 305 118, 437n319 economic activities, 302 Rawls, J. as market-based financing, 312 individual rights and freedoms, 90 rehypothecation, 310–11 Rechtsstaat, 74, 370n283 repo and securities lending market, regulatory capital, 254, 257, 272, 454n7 307–10 Regulatory Cooperation Council (RCC), risk transformation, 303, 305 122–3 Securitization, 304–7 regulatory infrastructure, 15 see also banking sector rehypothecation, 310–11, 485n379, Sharman, C., 125 486n382 Shavell, S., 190–1 ‘relative’ freedom, 21 short-term funding, 293, 296 relative priority, 26 Sidgwick, Henry, 158 repo market, 307–10 sin taxes, 193 return on capital employed six-pack regulation, 121, 131–2, 134, (ROCE), 298 394n330, 401n411 return on equity (ROE), 257, 298 Smith, Adam, 64 revenue-based taxation models, 265 invisible hand principle, 47, 64–5, reverse qualified majority voting 103, 166 (RQMV) procedure, 131, 401n414 typology of freedom, 108 Rhineland capitalism, 68 ‘Wealth of Nations,’ 30 Rhys-Williams, J., 185 Smithian “system of natural liberty,” 158 Ricardo theorem, 233–4 social calculus problem, 47, 52 risk externalization, 266–7 social citizen rights, 92–3 risk management, 254 social contract paradigm, 36 risk transformation, 289–92, 303 social costs, 163–5 Roll-Over Option Facility (ROOF), marginal, 164–6 477n270 social-democratic welfare state, 78 Rothbard, M., 40, 208–9 social disintegration, 103 rule of law social harm, 14, 160–1, 170, 185, 192–3, Hayek’s interpretation, 47, 76 196–7, 200–1, 208, 213, 217–18, neoliberal nature of, 71–6 248, 268–9, 275 Rüstow, A., 47, 68–70, 358n124, caused by pollution, 222, 248–9 369n265 Coase argument, 167–8 Rybczynski model, 238 of CO2 emissions, 198–9 512 Index social harm – continued globalization dynamics, 86–7 consolidation of variations in interdependence and reciprocity Pigovian tax based on, 244 between society and, 79–81 social instability as, 195 in libertarianism, 38–9 social justice, 37, 60 modern state, 81 social liberalism, 28, 34–7, 43 power, 82 concept of freedom in, 29–30 protection against foreign invaders, counter-movement against, 35 98–100 ‘equal opportunities for role of individual freedom, 87–114 everyone,’ 35 21st century, 86–7 individual freedom in, 34 state–citizen relationship, 12, 24–6, natural laws and rights, 35, 37 31–2, 38–9 ownership, concept of, 35, 37 (semi)-globalization, impact on, 26 triangulation ‘freedom – individualism – state interventionism, 64 development,’ 34 stateless society, 39 social rights, 99 state–market relationship, 12, 62–3, 65 social structure of accumulation state-sovereignty, 77 (SSA), 320 and legitimacy, 79–80 soft law, 253 Stiegler, B., 111, 388n257 sovereign power, 79 Stolper–Samuelson model, 238 sovereign theories, 80 Streeck, W., 123, 125–6, 128, 342 sovereignty, 79, 82, 328 Suarez, J., 293–6 absolute, 83, 85–6 Sumner, W., 38 Bodin’s views, 83–4 Svendsen, L., 123 characteristic of, 80 systemically important financial definition, 83 institutions (SIFIs), 277–8, 280, democratic sovereign, 108–14 295, 433n277 dynamics, 82–6 definition, 276–7 fear and, 98–100, 123 domestic SIFI (D-SIFI), 277 function-sovereignty, 141–2 excise tax on, 468n172 Hobbes’s definition of, 84 global SIFIs (G-SIFIs), 277 market, 117 global systemically important insurers power of, 84 (G-SII), 277 primary role of, 215 non-bank G-SIFI, 277 right to self-preservation and taxation mechanism of, 277–83 security, 84 systemic events, 275 social contract between the state and systemic expected shortfall (SES), 280 individuals, 85 ‘systemic expected shortfall’ (SES), 280 sovereign as state-market, 256, 331 systemic risk, conceptualization of, taxation and equality, 84–5 274–6, 281, 295, 458n62 sovereignty – taxation symbiosis, 13–14 forms, 276 special-purpose vehicle (SPV), 304–5 systemic risks, 262–3, 302 Spencer, H., 38 system-wide instability, 278 Spinoza, Baruch de, 79, 85–6 Stability and Growth Pact, 395n333 tax instruments, 187 state, concept of, 77–8 taxpayer–state relationship, 38 citizens, 80 tax systems, 4–5, 8–9 definition, 82 bank taxation models and expected dimensions and role of taxation, 80–2 outcome, 265–9 distinguished from concept of Baumol–Tobin model, 161 ‘nation,’ 79 capital tax, 223 Index 513

criterion of functionality, 151 tolerance principle, 21–2 direct taxation, 143–6 ‘too big to fail,’ concept of, 3 distributive nature of, 9 Treanor, P., 56 Dutch bank tax, 259–61 Treaty on Stability Coordination and environmental taxes, 138, 150, 164, Governance in the Economic and 176, 179, 186, 199, 453n128 Monetary Union (TSCG), 395n333 EU rule and a national rule, 8–9, 146–8 Treaty on the Functioning of the EU EU structure, 8–9, 120–1, 142–8 (TFEU), 120, 407n25 financial transaction tax, 258, 261 Tullock, G., 54 fiscal taxes, 183–4 two-pack regulation, 121, 131–2, 134, historical dimensions of (tax) 401n411 sovereignty, 140–2 instrumentalism and legitimacy undercapitalization of society, 102–3 in, 150–3 Universal Declaration of integration and aligned policies, 9 Human Rights, 140 internationalization and digitalization universalistic, 20 affecting tax matters, 148–9 US-characterizing individualism, 50 and intra-EU relationships, 9 US/EU Transatlantic Trade and liability vs corrective taxation, 190 Investment Partnership (TTIP), long-run social optimum (LRSO) of 122–3 tax policy, 175 utilitarianism, 28 nature of the willingness to pay taxes, 149–50 Vaughn, K., 162–3 observations regarding contemporary Vermeiren, M., 62 income tax-based systems, 153–6 Vietnam War, 47 optimal, 173–4, 183 volatility-inducing externalities, 301 optimal relationship a principle of volatility paradox, 279 proportionality, 147 voluntary payments and support, progressive, and rising inequality, 8–11 impact of, 39 pure wealth tax, 195 von Mises, L., 44–5, 60, 208–9, 353n69 and reciprocity between state and von Mises–Rothbard theorem, 209 society, 80–2 taxing of working middle class, 38 Walter Lippmann Colloquium, 44–5, 70, tax nudging, 152 358n122 traditional objectives of, 155 Weitzman, M., 170 on uninformed arbitrageurs in a welfare economics, 158 laboratory experiment, 464n126 welfare ex ante, 210 see also Pigovian tax model welfare state, 63, 78 Taylor, M. C., 94–5 concept of freedom in, 92–4 technological externalities, 206 modern, 379n123 telocracies, 73–5 Western companies, 1 theory, 26 Western liberal-democratic nations, 5 ‘Theory der Grundrechte,’ 146–7 World Economic Forum, 2 Thompson, E. A., 202 throughput-oriented authority, 133, Yale project on Climate Change 403n437 Communication, 410n57 Tideman, T. N., 198 Tobin, J., 161 zoön politikon, 104 Tobin tax, 161 Zuidhof, P.W., 65