60 Finance & economics The EconomistAugust 1st 2020
2 companies. But the Dutch and the Irish are
reluctant to squeeze firms. Some members
have long pledged a tax on financial tran-
sactions. But as James Tobin, its intellectu-
al godfather, supposedly said, the levy is
like the Loch Ness Monster: the idea occa-
sionally pops up then disappears for years.
National vetoes might make taxing for-
eigners look attractive. Leaders said they
would try to implement two such levies by
2023: a “carbon border-adjustment mecha-
nism” (a tariff on climate-unfriendly im-
ports), which could raise €5bn-14bn a year,
and a less lucrative levy on (mainly Ameri-
can) tech firms. Yet these face problems
too. The border mechanism is devilish to
design and will be challenged at the World
Trade Organisation. America’s opposition
to a digital tax has stalled a parallel process
at the oecd, and given pause to govern-
ments trying to impose national versions.
Contributions from members based on
national income have long made up the
bulk of the eu’s budget (see chart). Every
seven years countries grapple over minor
adjustments to it; the summits are bruis-
ing, but governments retain control. Intro-
ducing fresh own resources would jolt
them out of such zero-sum thinking, says
Valérie Hayer, a French member of the
European Parliament, and give heft to com-
mon priorities, such as climate. The parlia-
ment, which must approve last week’s deal,
will seek to ensure that governments’ vows
on own resources are not “empty”, she
adds. Yet it cannot force their hands.
If the own-resources discussion flops,
countries could simply pay more into the
next budget to repay the recovery-fund
debt. But history shows that governments
under fiscal pressure prefer to cut the eu’s
spending, says Ms Rubio; common endeav-
ours such as research were slashed to pre-
serve the recovery fund last week. Still, a lot
can happen before 2028. For the euto bor-
row and redistribute hundreds of billions
of euros would have seemed unimaginable
a year ago. The topic of own resources “was
never sexy”, says Mr Monti. “Now it is be-
ginning to become so.” 7Stumping up the cash
EuropeanUnion,sourcesofrevenue,%oftotalSource:AustrianInstitute
ofEconomicResearch *Linkedtogrossnationalincome100806040200
1815100520009590851979OtherCustoms dutiesVAT-based Contributions based
on national income*E
mmanuel farhishowed a lot of
promise in a lot of fields. At 16 he won
a national physics competition in
France. In the test to enter its most pres-
tigious engineering school, he received
the highest mark. After considering a
career in maths, he settled on econom-
ics, where he flourished. “He was one of
the greatest economic minds of his
generation,” says Xavier Gabaix, a col-
league at Harvard University. But on July
23rd that career was cut short when Mr
Farhi died unexpectedly at the age of 41.
His research interests were unusually
broad, covering competition, interna-
tional macroeconomics, tax and produc-
tivity. The common thread was a motiva-
tion to help policymakers understand
the world. With Mr Gabaix, Mr Farhi
considered how to design taxes when
people are not as rational as economists
typically assume. Carbon taxes are
thought to be a way of forcing consumers
to bear the environmental costs of their
choices. But if future fuel consumption
is not on people’s minds when they shop
for cars, such a tax may not work, and
rules that limit emissions would be
better. In research with David Baqaee of
the University of California, Los Angeles,
he studied the sources of productivity
growth, and showed that ignoring firm-
level differences could obscure the over-
all picture.MrFarhi’smost-cited work was on
safe assets, written in 2008 with Ricardo
Caballero of the Massachusetts Institute
of Technology and Pierre-Olivier Gou-
rinchas of the University of California,
Berkeley. They argued that the global
demand for safe assets had outpaced
supply over recent decades. America’s
economic and political might made it
well-placed to service this savings glut.
As a result, its current-account deficit
had bulged, and its assets accounted for a
bigger slice of global portfolios.
That paper spawned more research on
how the world was stuck in a “safety
trap”. Demand for havens had led to an
appetite for pseudo-safe assets, such as
packaged subprime loans. But these were
soon revealed to be far from safe. And,
after the debt crisis of 2010-12, investors
realised that sovereign bonds in the euro
zone were wobbly. The result was a se-
vere global shortage of safe assets. In-
terest rates fell but, having fallen to
around zero, could not decline further.
The result was that interest rates for
households and firms were, in effect, too
high—and, in turn, their consumption
and investment too low.
Mr Farhi saw America’s role as the
world’s banker as unsustainable. If it
produced too few safe assets then, with
interest rates unable to adjust fully,
global aggregate demand would stay
depressed. But if it tried to keep up with
investors’ demand for safety, its ability to
repay its debts might one day be called
into question. Speaking to the Richmond
Federal Reserve in 2019, he noted Ameri-
ca’s shrinking share of the global econ-
omy and worried that its role was becom-
ing too much to bear.
One solution would be for other
issuers of safe assets, such as the Euro-
pean Union or China, to emerge—though
in a paper with Matteo Maggiori of Har-
vard, Mr Farhi warned that the transition
could be messy. For now, investors
doubting the safety of American govern-
ment bonds had few other places to park
their cash. But as alternatives became
available, Treasuries would become
much more vulnerable to self-fulfilling
crises. The dominance of the dollar
would be challenged, said Mr Farhi in
2019, though “you have to take the long
view here and think about the next de-
cades, not the next five years”. The trage-
dy is that he did not live long enough to
test the prediction.A lostasset
Emmanuel FarhiWASHINGTON, DC
Economics loses a prolific thinker