Wednesday, January 31, 2018

31/1/18: What Teachers of Piketty Miss on r vs g


A popular refrain in today’s political and socio-economic analysis has been the need for aggressive Government intervention (via taxation and regulation) to reverse growing wealth inequality. The narrative is supported by the increasing numbers of center and centre-left voters, and is firmly held in the key emerging demographic of the Millennial voters. The same narrative can also be traced to the emergence of some (not all) populist movements and political figures.

Yet, through regulatory restrictions, Governments in the recent past not only attempted to manage risks, but also created a system of superficial scarcity in supply of common goods & services (healthcare, education, housing etc) and skills, as well as access to professional services markets for practitioners. This scarcity de facto redistributes income (& thus, wealth) from the poor to the rich, from those not endowed with assets to those who inherit them or acquire them through other non-productive means, e.g. marriage, corruption, force. Many licensing requirements, touted by the Governments as the means for ensuring consumer protection, delivering social good, addressing markets failures and so on are either too cumbersome (creating a de facto bounds to supply) or outright skewed in favour off the incumbents (e.g. financial services licensing restrictions in trivial areas of sales and marketing). 

The re-distribution takes the form of high rents (paid for basic services that are woefully undersupplied: consider the California ‘water allocations’ and local authorities dumping federal subsidies to military personnel onto private sector renters, or consider the effect of pensions subsidies to police and other public services providers that are paid for by poorer taxpayers who themselves cannot afford a pension). 

This benevolent-malevolent counter-balancing in Government actions has fuelled wealth inequality, not reduced it, and the voters appear to be largely oblivious to this reality.

Crucially, the mechanism of this inequality expansion is not the simple r>g relationship between returns to capital (r) and the growth rate in the economy (g), but a more complex r(k)>r(hh)>r(g)>r(lh) relationship between returns to financial & restricted (r(k)), inc property & water rights in California, etc, high-quality human capital (r(hh)), inc returns to regulated (rationed) professions, the rate of growth in the economy (g), and the returns to low-quality human capital (r(lh)), inc returns to productive productive), but un-rationed professions. 

Why this is crucial? Because the r>g driven inequality, the type that was decried by Mr. Piketty and his supporters is missing a lot of what is happening in the labor markets and in large swathes of organisational structures, from limited partnerships to sole traders. Worse, lazy academia, across a range of second-tier institutions, has adopted Piketty’s narrative unchecked, teaching students the r vs g tale without considering the simple fact that neither r, nor g are well-defined in modern economics and require more nuanced insight. 

Yes, we now know that r>g, and by a fat margin (see https://www.frbsf.org/economic-research/files/wp2017-25.pdf). And, yes, that is a problem. But that is only one half off the problem, because it helps explain, in part, the 1% vs 99% wealth distribution imbalances. But it cannot explain the 10% vs 90% gap. Nor can it explain why we are witnessing the hollowing-out of the middle class, and the upper middle class. A more granular decomposition of r (and a more accurate measurement of g - another topic altogether) can help.

The non-corporate entities and high human capital individual earners can still benefit from the transfers from the poorer and the middle classes, but these benefits are not carried through traditional physical and financial capital returns or corporate rent seeking. (Do not take me wrong: these are also serious problems in the structure of the modern economy). 

Take for example, two professionals. Astrophysicist employed in a research lab and a general medical practitioner. The two possess asymmetric human capital: astrophysicist has more of it than a general medical doctor. Not only in duration of knowledge acquisition (quantity), but also in the degree of originality of knowledge (quality). But, one’s supply of competitors is rationed by the market (astrophysics high barrier to entry is… er… the need to acquire a lot of hard-to-earn human capital, with opportunity costs sky-high), another is rationed by the licensing and education systems. Guess which one earns more? And guess which one has access to transfers from the lower earners that can be, literally, linked to punitive bankruptcy costs? So how much of the earnings of the physician (especially the premium on astrophysicist’s wage) can be explained by a license to asymmetric information (extracting rents from patients) and by restrictions on entry into profession that go beyond assurance of quality? How much of these earnings are compensation for the absurdity of immense tuition bills collected by the medical schools with their own rent-seeking markets for professional education? And so on.

In a way, thus, the Governments have acted as agents for creating & sustaining wealth inequality, at the same time as they claimed to be the agents for alleviating it. 

Yes, consumer protecting regulation is necessary. No question. Yes, licensing is often necessary too (e.g. in the case of a physician as opposed to a physicist). But, no - transfers under Government regulations are not always linked to the delivery of real and tangible benefits of quality assurance. Take, for example, restrictive development practices and excessively costly planning bureaucracies in cities, like, San Francisco. While some regulation and some bureaucracy are necessary, a lot of it is pure transfer from renters and buyers to bureaucrats as well as investors. So, do a simple arithmetic exercise. Take $100 of income earned by a young professional. Roughly 33% of that goes in various taxes and indirect taxes to the Governments. Another 33% goes to to the landlord protected by these same Governments from paying the full cost of bankruptcy (limited liability) and from competition by restrictive new building and development rules. Another 15% goes to pay for various insurance products, again - regulated and/or required by the Governments - health, cars, renters’ etc. What’s left? Less than 20% of income puts gas into the car or pays for transportation, buys food and clothing. What exactly remains to invest in financial and real assets that earn the r(k) and alleviate wealth inequality? Nada. And if you have to pay for debt incurred in earning your r(hh) or even r(lh), you are… well… insolvent. Personal savings averaged close to 6.5-7% of disposable income in 2010-2014. Since then, these collapsed to 2.4% as of December 2017. Remember - the are percentages of the disposable income, not gross income. Is that enough to start investing in physical and/or financial capital? No. And the numbers quoted are averages, so \median savings are even lower than that.

Meanwhile, regulated auto loans debt is now at $4,340 per capita, regulated credit card debt is at $2,930 per capita, and regulated student loans debt is now at $4,920 per capita. Federal regulations on credit cards debt are know n to behaviourally create barriers to consumers paying this debt down and/or using credit cards prudently. Federal regulations make student loans debt exempt from bankruptcy protection, effectively forcing borrowers who run into financial troubles into perpetual vicious cycle of debt spiralling out of control. Auto loans regulations effectively create and encourage sub-prime markets for lending. So who is responsible for the debt-driven part of wealth inequality? Why, the same Government we are begging to solve the problem it helps create.

Now, add a new dimension, ignored by many followers of Mr. Piketty: today’s social & sustainability narratives risk to deliver more of the same outcome by empowering Governments to create more superficial scarcity. This does not mean that all regulations and all restrictions are intrinsically bad, just as noted before. Nor does it mean that social and environmental risks are not important concepts. Quite the opposite, it means that we need to pay more attention to regulations-induced transfers of wealth and income from the lower 90% to the upper 10% and to companies and non-profits across the entire chain of such transfers. If we want to do something about our social and environmental problems (and, yes, we do want) we need to minimise the costs of other regulations. We need to increase r(hh) and even more so, r(lh). And we need to increase the g too. What we do not need to do is increase the r(k) without raising the other returns. We also need to recognise that on the road paved with good (environmental) intentions, we are transferring vast amounts of income (and wealth) from ordinary Joe and Mary to Elon Musk and his lenders and investors. As well as to a litany of other rent-seeking enterprises and entrepreneurs. The subsidies fuel returns to physical and fixed capital, intellectual property (technological capital), financial capital, and to a lesser extent to higher quality human capital. All at the expense of general human capital.

Another aspect of the over-simplified r vs g narrative is that by ignoring the existent tax codes, we are magnifying the difference between various forms of r and the g. Take the differences in tax treatment between physical, financial and human capital. Set aside the issue of tax evasion, but do include the issue of tax avoidance (legal and practiced with greater intensity the higher do your wealth levels reach). I can invest in fixed capital via a corporate structure that allows depreciation tax claws-backs and interest deductions. I can even position my investment in a tax (non-)haven jurisdiction, like, say Michigan or Wisconsin, where - if I am rich and I do invest a lot, I can get local tax breaks. I can even get a citizenship to go along with my investment, as a sweetener. Now, suppose I invest the same amount in technological capital (or, put more cogently, in Intellectual Property). Here, the world is my oyster: I can go to tax advantage nations or stay in the U.S. So my tax on these gains will be even lower than for fixed capital. Investing in financial capital is similar, with tax ranges somewhere between the two other forms of capital. Now, if I decided to invest in my human capital, my investments are not fully tax deductible (I might be able to deduct some tuition, but not living expenses or, in terms of corporate finance, operating expenses and working capital). Nor is there a depreciation claw back. There is not a tax incentive for me to do this. And my returns from this investment will be hit with all income taxes possible - state, and federal. It is almost sure as hell, my tax rate will be higher than for any form of non-human capital investment. Worse: if I borrow to invest in any form of capital other than human capital, and I run into a hard spot, I can clear the slate by declaring bankruptcy. If I did the same to invest in human capital, student loans are not subject to bankruptcy protection.

Not to make a long argument any longer, but to acknowledge the depth of the tax policy problems, take another scenario. I join as a partner a start up and get shares in the company. Until I sell these shares as a co-founder, I face no tax liability. Alternatively, I join the same start up as a key employee, with human capital-related skills that the start up really, really needs to succeed. I get the same shares in the company. Under some jurisdictions rules, I face immediate tax liability, even if I can never sell these shares in the end. Why? Ah, no reason, other than pure stupidity of those writing tax codes. 

The net effect is the same across all of the above points: risk-adjusted after tax returns on investment in human capital are depressed - superficially - by policies. Policies, therefore, are driving wealth inequality. After-tax risk-adjusted returns to human capital are lower than after-tax risk-adjusted returns on physical, financial and technological capital.

Once again, we need to increase returns to human capital without raising returns to other forms of capital. And we need to increase real rates of economic growth (what that means in the real world - as opposed to what it means in the world of Piketty-following academia is a different subject all together). And we need to get Government and regulators out of the business of transferring our income and potential wealth from us to the 1%-ers and the 10%-ers. 

How do we achieve this? A big question that I do not have a perfect answer to, and as far as I am aware, no one does. 

One thing we must consider is systemically reducing rents obtained through inheritance, rent seeking and other unproductive forms of capital acquisition. 

Another thing we must have is more broadly-spread allocation of financial assets linked to the productive economy (equity). In a way, we need to dramatically broaden share holding in real companies’ assets, among the 90%. Incidentally, this will go some ways in addressing the threat to the social fabric poised by automation and robotisation: making people the owners of companies puts robots at work for people. 

Third thing is what we do not need: we do not need is a penal system of taxation that reduces r(hh) and r(lh). Progressive income taxation delivers exactly that outcome. 

Fourth thing: we need to recognize that some assets derive their productivity from externalities. The best example is land, which derives most of its value from socio-economic investments made by others around the site. These externalities-related returns must be taxed as a form of unearned income/wealth. A land value tax or a site value tax can do the job.

As I noted above, I do not claim to hold a solution to the problem. I do claim to hold a blue print for a systemic approach to devising such a solution. Here it is: we need sceptical, independent  & continuous impact analysis of every piece of regulation, of every restriction, of every socially and environmentally impactful (positive or negative) measure. But above all, we need to be sceptical about the role of the Government, just as we have become sceptical about the capacity of the markets. Scepticism is healthy. Cheerleading is cancerous. Stop cheering, start thinking deeper about the key issues around inequality. And stop begging for Government action. Government is not quite the panacea we imagine it to be. Often enough, it is a problem we beg it to solve. 



Sunday, January 28, 2018

28/1/18: Political Polarization: Evidence form the U.S. trends


What's 'normal'? Pew Research data on political polarization in the U.S. (full report here http://www.people-press.org/interactives/political-polarization-1994-2017/).





A very dramatic drift toward the tails of the original distributions for both the Republicans and the Democrats, and, associated with this, an effective collapse in the numbers of the U.S. voters in the overlapping/shared position.

Removing the potential filter for political affiliation skewing the results:



Looking at pure preferences (excluding party identification), there has been a flattening (left-skewed) of public preferences spectrum. This also is consistent with growing polatization, but it is also consistent with increasing support by the voters for Extreme-Left and Left positions. The Center worldview has diminished substantially.

You can read my view on longer term trends and drivers for this dynamic here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3033949.

27/1/18: Human Freedom Index 2017: U.S. Exceptionalism vs Irish Example


Cato released their 2017 Human Freedom Index. The link is here: https://object.cato.org/sites/cato.org/files/human-freedom-index-files/2017-human-freedom-index-2.pdf and all data is available here: https://www.cato.org/human-freedom-index.

Two things worth noting:

Ireland: the country ranks in top 5 in the overall Index, in the 4th place overall, which is unchanged on 2016 report. This compares against 3rd place ranking in 2013-2014 index. One key area of strength - Economic Freedom sub-index. This is a problem area for the Index, which relies on GDP-based metrics and, thus, significantly overstates Irish economic performance. Aside from this, in many other areas, the index presents a correct picture of the country.

The U.S.: the index consistently debunks the myth of American exceptionalism. The country is ranked lowly 17th in 2017 overall, with Personal Freedom ranking of disastrous 24th and with a respectable 11th rank in Economic Freedom.

Here is what is going wrong the U.S. side of the Index:

  • In the Rule of Law section, the U.S. scores below 7.0 (poor showing for an advanced economy) in both civil and criminal justice systems assessments;
  • In Religious Freedom, the U.S. scores low 7.3 in Harassment and Physical Hostilities category;
  • In Expression and Information, the country scores 7.5 in Political Pressure, Control Media;
  • In Identity and Relationships, the U.S. score is 7.0 for Legal Gender
  • The country scores below 9.0 in overall Rule of Law grouping, in Homicide category, in overall Religious Freedom grouping, and in Laws and Reg. That Influence Media category.
  • Sadly, there are no rankings relating to the extent of personal lives control by the 'Deep State' or security forces. Neither do Cato folks measure access to healthcare, quality of public services, education etc - the key aspects of the functional society that are clearly sub-standard in the U.S. case. Nor does the Index address the extent of bureaucratic over-reach into the lives of the residents. Were these aspects to be considered, I doubt the U.S. would be ranked anywhere near top 30.
When it comes to Economic Freedom, in absolute terms, the U.S. is not exceptional by any measure, either. In fact, the country scores above 9 only in the following categories/groupings:

  • Sound Money, a grouping that includes: Money Growth, Standard Deviation of Inflation, Inflation: Most Recent Year, Freedom to Own Foreign. Currency
  • Black-Market Exchange Rates category, and
  • Credit Market Regulations and Labor Market Regulations categories
This is hardly the stuff of legends. The U.S. ranking performance is mediocre for a nation that promotes itself as a bastion of personal and economic freedoms and the leading light for liberty. 

Just take this last number into consideration: when it comes to rating the U.S. on freedom of movement of capital and people, Cato gave the nation a miserly score of 3.7/10. And in Freedom to Trade Internationally, the nation that claims moral leadership across the WTO, TPP, TTIP, Nafta and beyond, the 'guardian of the seas' scores 7.5/10, with sub-8.5 scores in Tariffs and Regulatory Trade Barriers categories.

 Irony has it, the 2017 ranking for the U.S. (at #17) is vastly better than 2016 ranking (at #24).  Neither is, however, good enough. Data wrinkles aside, tiny Ireland offers more grounds for global leadership-by-example than the U.S. does.

27/1/18: VCs Funding Bonanza. Missing Central Coast


Based on data compiled by Bloomberg, 2017 was a bumper year for VC-funded startups across the U.S., with significant increase in the geographic diversification of funds flows across many states.

You can see the full analysis here: https://www.bloomberg.com/graphics/2018-venture-capital-deals/.

From our local, Monterey, perspective, here is the kicker: in 2017, Monterey County (with population around 415,000) was ranked below its neighbor, Santa Cruz County (with population of around 262,000) in terms of total VC-funded deals volumes. And by a significant margin lower.

You can see this from the chart for 2017


Of course, every cloud has a silver lining, of sorts. The one this year is that at least Monterey County managed to register on the VCs' radar. Back in 2015 it was just a blank void for start ups investment.


Tuesday, January 23, 2018

22/1/18: Interest Rates, Demographics and Secular Stagnation: Euro Area 2018-2025


An interesting recent paper from ECB on the link between monetary policy (interest rates) and secular stagnation. Ferrero, Giuseppe and Gross, Marco and Neri, Stefano, ECB Working Paper, titled "On Secular Stagnation and Low Interest Rates: Demography Matters" (July 26, 2017, ECB WP No. 2088: https://ssrn.com/abstract=3009653) argues that adverse demographic developments can account for a long-run (since the mid-1980s) trend decline in real and nominal interest rates. In particular,  demographic factors linked to secular stagnation, have "exerted downward pressures on real short- and long-term interest rates in the euro area over the past decade."


Using EU Commission projected dependency ratios to 2025, the authors "illustrate that the foreseen structural change in terms of age structure of the population may dampen economic growth and continue exerting downward pressure on real interest rates also in the future".

Specifically, "the counterfactual projections suggest an economically and statistically relevant role for
demography. Interest rates would have been higher and economic activity growth measures stronger under the assumed more favorable historical demographic assumptions. Concerning the forward-looking assessment, interest rates would remain at relatively low levels under the assumption that demography develops as projected by the EC, and would rise visibly only under the assumed more favorable forward paths for dependency ratios."

Here are the dependency ration projections (red dots = EU Commission report projections; purple dots = 2015 outrun remains stable over 2016-2025 horizon, green line = mid-point between EU Commission forecast and static 2015 scenario):

And now, translating the above dependency ratios into macroeconomic performance:
Notice the following: under both, the adverse (European Commission estimates) and the moderate (central - green) scenarios, we have real GDP growth materially below 1 percent by 2025 and on average, below historical average levels for pre-crisis period. This is secular stagnation. In fact, even under the benign scenario of no demographic change from 2015, growth rate is unimpressive. Potential output panel confirms this.

Monday, January 22, 2018

21/1/18: FT Warns on Credit Cards Delinquencies: High or Hype?


The FT are reporting a 20% rise in credit cards delinquencies across major U.S. banks in 2016, compared to 2017 (see here: https://www.ft.com/content/bafdd504-fd2c-11e7-a492-2c9be7f3120a). Which sounds bad. Although, of course, neither new nor completely up-to-date. That is because the NY Fed give us the same figures (for all U.S. households) through 3Q 2017.

So here is the analysis of the Fed figures:
Despite these worrying dynamics, the levels of delinquencies are still low. In 2007-2008, credit card delinquencies rates were around 9.34% and 10.84%, respectively. In 2006, these were 8.54%. In fact, current running average for 1Q-03Q 2017 is 6.14% or lower than for any year between 2003 and 2012. 

As the chart below shows, the real crisis is currently unfolding not in the credit cards debt, but in Student Loans with 10.05% average delinquency rate for 2017 so far. Credit crds delinquencies are only fourth in terms of severity. 


In terms of total volumes of debt in delinquency, 3Q 2017 data shows credit cards with USD12.3 billion, against mortgages at USD88.56 billion, student loans at USD 30.16 billion and auto loans at USD 17.05 billion. 

Even in terms of transition from shorter-term delinquency (30 days-89 days) to longer-term delinquency (90days and over), credit cards are not as prominent of a problem as student loans:

In summary, thus, the real crisis in the U.S. household debt is not (yet) in credit cards or revolving loans, and not even (yet) in mortgages. It is in student debt, followed by auto loans.

21/1/18: Student Loans Debt Crisis: It Only Gets Worse


A new research from the Brookings Institution has shed some light on the exploding student debt crisis in the U.S. The numbers are horrifying (for details see https://www.brookings.edu/wp-content/uploads/2018/01/scott-clayton-report.pdf) (emphasis mine):

"Trends for the 1996 entry cohort show that cumulative default rates continue to rise between 12 and 20 years after initial entry. Applying these trends to the 2004 entry cohort suggests that nearly 40 percent may default on their student loans by 2023." In simple terms, even 12-20 years into the loan, default rates are rising, which means that after we take out those borrowers who are more likely to default (earlier defaulters within any given cohort), the remaining borrowers pool is not improving. This applies to the cohort of borrowers who entered the labour markets at the end/after the Recession of 2001 - a cohort that started their careers before the Global Financial Crisis and the Great Recession, and that joined the labor force at the time of rapid growth and declining unemployment.

"The new data show the importance of examining outcomes for all entrants, not just borrowers, since borrowing rates differ substantially across groups and over time. For example, for-profit borrowers default at twice the rate of public two-year borrowers (52 versus 26 percent after 12 years), but because for-profit students are more likely to borrow, the rate of default among all for-profit entrants is nearly four times that of public two-year entrants (47 percent versus 13 percent)." Which means that the ongoing process of deregulation of the for-profit education providers - a process heavily influenced by the Trump Administration close links to the for-profit education sector (see https://www.theatlantic.com/education/archive/2017/08/julian-schmoke-for-profit-colleges/538578/ and https://www.politico.com/story/2017/08/31/devos-trump-forprofit-college-education-242193)  - is only likely to make matters worse for younger cohorts of Americans.

On a related: "Trends over time are most alarming among for-profit colleges; out of 100 students who ever attended a for-profit, 23 defaulted within 12 years of starting college in the 1996 cohort compared to 43 in the 2004 cohort (compared to an increase from just 8 to 11 students among entrants who never attended a for-profit)." So not only things are getting worse over time on their own, but they will be even worse given the direction of deregulation drive.

"The new data underscore that default rates depend more on student and institutional factors than on average levels of debt. For example, only 4 percent of white graduates who never attended a for-profit defaulted within 12 years of entry, compared to 67 percent of black dropouts who ever attended a for-profit. And while average debt per student has risen over time, defaults are highest among those who borrow relatively small amounts." This highlights, amongst other things, the absurd nature of the U.S. legal frameworks governing the resolution of student debt insolvency: the easier/less costly cases to resolve (lower borrowings) in insolvency are effectively exacerbated by the lack of proper bankruptcy resolution regime applying to the student loans.

Some charts:

Data above clearly highlights the dramatic uplift in default rates for the more recent cohort of borrowers. At this point in time, borrowers from the 2003-2004 cohort already exhibit higher cumulative default rates than the previous cohort exhibited over 20 years horizon. Worse, the rate of increases in default rates is still higher for the later cohort than for the earlier one. Put differently, things are not only worse, but are getting worse faster.

And here is the breakdown by the type of institution:
For-profit institutions' loans default rates are now at over 50% and rising. In simple terms, this is a form of legislatively approved and supported debt slavery, folks.

Beyond the study, here is the latest data on student loans debt. Student loans - aggregate - transition into delinquency is highest of all household credit lines:

And the total volume of Student Loans debt is now second only to mortgages:


Friday, January 19, 2018

19/1/18: Tears over QE & U.S. Household Debt Problem


As (some) White House-linked (or favouring) economists lament the Fed's QE (and there are reasons to lament it), one thing is clear: the unprecedented monetary policies of the recent years have achieved two things:

  1. The Fed QE has fuelled an unprecedented boom in risky assets (bonds, equities, property, cryptos, you name it); and
  2. The Fed QE sustained a dangerous explosion of personal household debt
Which, taken together, means that the rich got richer, and the middle classes and the poor got poorer. Because debt is not wealth. Worse, the policies past have set the stage for a massive unraveling of the credit bubble to come, if the Fed were to attempt to seriously raise rates.

Note: the figures below are not reflective of a reportedly massive jump in consumer credit in 4Q 2017 (see: https://www.marketwatch.com/story/consumer-credit-growth-surges-in-november-by-most-in-16-years-2018-01-08?siteid=bnbh). 

Here is the latest data on personal household debt:

\And here is the aggregate data (also through 3Q 2017) from the NY Fed:

Year on year, 3Q 2015 growth in total household debt in the U.S. stood at 3.03%. This fell to 2.36% in 2016, before rising to 4.90% in 2017, the highest annual rate of growth for the third quarter period since Q3 2007.

Aggregate household debt in 3Q 2017, relative to 2005-2007 average was:
  • 11.8% higher in 3Q 2017 for Mortgages;
  • 23.4% lower for HE Revolving;
  • 51.9% higher for Auto Loans;
  • 6.6% higher for Credit Cards;
  • 201.2% higher for Student Loans;
  • 6.5% lower for Other forms of debt; and
  • 19.7% higher for Total household debt
In current environment, a 25 bps hike in Fed rate, if fully passed through to household credit markets, will increase the cost of household credit by USD32.4 billion per annum. The same shock five years ago would have cost the U.S. household USD 28.3 billion per annum. Now, put this into perspective: current markets expectations are for three Fed rate hikes (and increasingly, the markets are factoring a fourth surprise hike) in 2018. Assuming the range of 3-4 hikes moves to raise rates by 75-100 basis points, the impact on American households of the QE 'normalization' can be estimated in the region of USD98-130 billion per annum. Since much of this will take form of the non-deductible interest payments, the Fed 'unwinding' risks wiping out the entire benefit from the recent tax cuts for the lower-to-upper-middle class segments of population. 

Now, let's cry about the QE... 

Thursday, January 18, 2018

18/1/18: The Arctic: A New "Old Conflicts" Frontier


A must-read set of three in-depth articles/visualizations from Bloomberg, documenting evolution of key environmental issues relating to the Arctic over time.

The first part covers the issue of the ice cap: https://www.bloomberg.com/graphics/2017-arctic/. The second part details the scale of political and geopolitical issues: https://www.bloomberg.com/graphics/2017-arctic/the-political-arctic/. Finally, part 3 covers economics of the Arctic region https://www.bloomberg.com/graphics/2017-arctic/the-economic-arctic/.

A genuinely impressive material worth reading.



As an added resource, Reuters are running a dedicated page on the news and issues involving the Arctic https://www.reuters.com/places/arctic

17/1/18: Apple's Plans for Foreign Cash and the Need for Larger Reforms


There is a lot that can be criticized in the GOP/Trump tax reforms passed late last year, but some things do make sense. Back in November 2016, in my column for the Cayman Financial Review (see here: http://trueeconomics.blogspot.com/2016/11/31116-cfr-tax-cure-for-american.html), I argued that a comprehensive tax reform of the U.S. corporate tax system, alongside a generous repatriation scheme for off-shored profits of the U.S. MNCs can provide a significant boost to the U.S. economy.

Today, we got some news confirming my assertion. Apple is planning to bring some USD350 billion back to the U.S. with a large scale investment portfolio aligned to this repatriation: https://www.cnbc.com/2018/01/17/apple-announces-350-billion-investment-20k-jobs-over-5-years.html.

However, to really lock in the new investment, President Trump and the Congress need to significantly revamp the existent system of work permits, work and business visas, starting with the current H1B system. Returning financial capital back to the U.S. is but the first step on the road to increasing the U.S. economic potential.

The second step must be opening up U.S. labor and entrepreneurship markets to inflow of talent from abroad (these markets are currently extremely closed). This will require not only revising numerical quotas, but also the following:

  1. Shifting admissions away from contingent workforce employers (contractors) and in favor of direct employment and sustainable, skills-based self-employment;
  2. Increasing ability (and incentives) for integration into the American society for newcomers (including, but not limited to, improving bureaucratic barriers to access to permanent residency and naturalization, improving the culture and the climate of government bureaucracies vis-a-vis higher skilled newcomers, etc);
  3. Creating new, more open, programs for entry into the U.S. for highly skilled and entrepreneurial migrants; and
  4. Encouraging greater mobility across employers for foreign highly skilled workers.
The third step must involve regulatory reforms that remove markets, financial & contractual supports for incumbent monopolistic firms (the rent-seekers, like big telecoms, large banks, automakers, etc). Opening the sectors to genuine competition will be the only chance the U.S. has to compete with the likes of China, and increase its own potential GDP).

Finally, the fourth step (partially already targeted by the recent tax reforms) must involve reducing the burden of direct and indirect taxes on the American wage earners, especially those with higher skills levels. The key here is to focus on both, direct and indirect taxation, and the latter, in my opinion, includes the cost of healthcare and pensions. 

Apple's announcement is the good news. And President Trump does deserve credit on this.  But tax holiday alone won't fix the problem of economic sclerosis that has plagued the U.S. economy for a good part of two decades now.

Tuesday, January 16, 2018

15/1/18: Of Fraud and Whales: Bitcoin Price Manipulation


Recently, I wrote about the potential risks that concentration of Bitcoin in the hands of few holders ('whales') presents and the promising avenue for trading and investment fraud that this phenomena holds (see post here: http://trueeconomics.blogspot.com/2017/12/211217-of-taxes-and-whales-bitcoins-new.html).

Now, some serious evidence that these risks have played out in the past to superficially inflate the price of bitcoins: a popular version here https://techcrunch.com/2018/01/15/researchers-finds-that-one-person-likely-drove-bitcoin-from-150-to-1000/, and technical paper on which this is based here (ungated version) http://weis2017.econinfosec.org/wp-content/uploads/sites/3/2017/05/WEIS_2017_paper_21.pdf.

Key conclusion: "The suspicious trading activity of a single actor caused the massive spike in the USD-BTC exchange rate to rise from around $150 to over $1 000 in late 2013. The fall was even more dramatic and rapid, and it has taken more than three years for Bitcoin to match the rise prompted by fraudulent transactions."

Oops... so much for 'security' of Bitcoin...