Monday's Top 10: Public display creates the value; huge new oil source; inequality and the middle class; Martin Wolf and Stephen Wolf on China; Dilbert, and more

Here's my edition of Top 10 links from around the Internet at 10:00 am today. We now have a Monday-Wednesday-Friday schedule for Top 10.

Bernard will be back with his version this Wednesday. We will have another guest posting on Friday.

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz.

See all previous Top 10s here.

1. Tough trade-offs
Safer roads and better schools, or a high quality community art collection?

That is the type of choice facing a bankrupt Detroit.

And its a classic cost-benefit trade-off argument that is more starkly framed in Detroit than elsewhere, but underpins community choices everywhere.

It's economics at the cliff-face, if you like.

The 'we need to have everything' view is not possible for them. Costs are easy to work out. But 'benefits' are more fraught. And the Detroit example reveals there are many people that see all sorts of benefits for retaining their vast and valuable art collection, even in bankruptcy.

Cornell economics professor Robert Frank has been looking at the issues. His analysis goes to the heart of the real definition of 'benefits'. The way this issues plays out in Detroit may frame how local governments worldwide eventually reassess the trade-offs.

Yet the point remains that prices affect the options we face. Relative to famous art, lesser-known works have become much cheaper in recent years, despite no evidence of any decline in their quality. In a rational world, this change would encourage curators to invest more heavily in emerging artists.

Many of these artists produce works that are deeply affecting, yet surprisingly affordable. Talented curators could assemble collections of their art that would delight visitors and draw fulsome praise from critics. And as those works became better known, their value would climb rapidly.

Ownership by public or nonprofit institutions is also not a prerequisite for public exhibition of prized art. The super rich pay so much for these works largely because they are already so famous. Yet being chosen for prominent display in public spaces was how many of these works became famous in the first place. If fewer museums owned them, the rich would have good reason to lend them more often for public display, as indeed many already do, thus preserving and enhancing their value. If sold, many of the institute’s famous works would return as loaners, along with such works from other collections.

If billionaires choose to bid up the prices of trophy art, that’s their privilege. And because most of them will die with large fortunes unspent, they can buy what they want without having to buy less of other things they value. But because money for worthy public purposes is chronically in short supply, city officials and true philanthropists must grapple with agonizing trade-offs.

Yes, communities benefit from famous paintings, but they also benefit from safer roads and better schools.

2. Oil supply optimism
What's going on with the oil price? Despite the endless warnings, it isn't rising. In fact in NZ$ terms, after inflation, it is falling. Oil is even our sixth largest export at $1.4 billion over the last year.

But we are peanuts in the vast international oil market. Some older areas are declining, some new ones growing. Interestingly though, it is some old areas that are growing fast: namely Iraq and the expectation is that Iran may soon follow.

It is probably this expectation of huge new supply that is keeping the price contained. It is also interesting that most of this huge new supply is not from the traditional western oil companies exploration, which may be why we occasionally here less than enthusiastic comments from some oil majors, like Shell. Here's the English Telegraph's report of what is happening, this week.

Spigots in the West Qurna-2 field, Iraq’s second-biggest, were opened officially over the weekend in a move that will release 120,000 barrels per day of crude oil onto international markets. The field in Southern Iraq near Basra will eventually pump out 1.2m barrels-per-day (bpd) of oil.

Iraq’s oil minister Abdul Kareem Luaibi has said that West Qurna-2 will enable the country to hit its target of pumping 4m bpd by the end of the year. Already the second-largest producer in the Organisation of Petroleum Exporting Countries (OPEC) after Saudi Arabia according to Reuters, Iraq pumped 3.5m bpd last month.

However, the sharp rise in Iraq’s oil production is likely to spark tensions within OPEC, which controls the world oil market. Baghdad currently operates outside the cartel’s quota system, which helps to maintain oil prices above $100 per barrel, the figure seen by most of its members including Saudi Arabia as vital for their economies to function.

The resurgence of Iraq’s oil production comes amid hopes that neighbouring Iran will soon boost production if sanctions are lifted.

3. 'It's middle class angst'
The study of the effects of income inequality is a rare thing done intensively. There are plenty of 'once over lightly' reviews (The Spirit Level) but one thing you can probably say is that such investigations are better done not by economists. (The academic world is breathlessly awaiting a new book on the subject by French economist Thomas Piketty which certainly won't be a light review.)

Sociologist Lane Kenworthy has also been looking at the issue for some time. I have no idea whether his research is better than anyone else's, but he does come to some unexpected conclusions. Actually, he doesn't on the big issue - should we be worried about inequality? He says we should, but his reasons are different.

And the most interesting thing is that what the rest of us are focused on, he isn't so worried about:

The evidence supports a number of the most prominent hypotheses only weakly or not at all. As best I can tell from the available data, income inequality hasn’t reduced economic growth. It hasn’t hindered employment. It may or may not have played a role in fostering economic crises, including the Great Recession. It hasn’t reduced income growth for poor households. It may or may not have contributed to the weakening of household balance sheets by encouraging too much borrowing. It may or may not have reduced equality of opportunity. It hasn’t slowed the growth of college completion. It either hasn’t reduced the increase in life expectancy or the decrease in infant mortality or, if it has, the impact has been small. It looks unlikely to have contributed to the rise in obesity. It hasn’t slowed the fall in teen births or homicides since the early 1990s. It may or may not have weakened trust. It doesn’t appear to have affected average happiness. In the United States it has had little or no impact on trust in political institutions, on voter turnout, or on party polarization. And while it may have boosted inequality of political influence, we lack solid evidence that it’s done so.

On the other hand, income inequality has reduced middle-class household income growth. It very likely has increased disparities in education, health, and happiness in the United States. And it has reduced residential mixing in the U.S.

4. The pitfalls of reverse mortgages
I admit I am no fan of reverse mortgages when the lender is a bank or financial company. It is very disappointing to see Heartland Bank adopting this 'product' as a key element of their growth plans. The social sting in these arrangements can leave some very unpleasant outcomes. Dealbook has been looking at them in the US:

The only solace for Isabel Santos as she spends her evenings huddled over stacks of yellowed foreclosure notices is that her parents are not alive to watch their ranch-style house in Pleasant Hill, Calif., slipping away.

Ms. Santos, 61, along with a growing number of baby boomers, is confronting a bitter inheritance: The same loans that were supposed to help their elderly parents stay in their houses are now pushing their children out. “My dad had nothing when he came here from Cuba and worked so hard to buy this house,” Ms. Santos said, her voice quivering.

Similar scenes are being played out throughout an aging America, where the children of elderly borrowers are learning that their parents’ reverse mortgages are now threatening their own inheritances. Reverse mortgages, which allow homeowners 62 and older to borrow money against the value of their homes that need not be paid back until they move out or die, have long posed pitfalls for older borrowers.

Now many like Ms. Santos are discovering that reverse mortgages can also come up with a harsh sting for their heirs.

5. Sorting out pre-launch fundamentals
Crowd funding is an important new business marketplace feature. It started in the big-time with Kickstarter, but many more platforms have arisen, and many more will here too now that the regulatory impediments have been sorted.

However, Barry Ritholtz recently declared called such schemes as "a perfectly legal scam" - assuming they are entirely a capital raising device. But many of the successful outcomes don't relate to funding, they relate to market research, says Virginia Postrel at Bloomberg.

“We allow entrepreneurs to prove themselves in a merit-based way,” by discovering whether a venture can in fact attract interest and money from potential customers, said Ringelmann. The site even allows campaigns to swap in new perks or change the required giving levels. “You can test your pricing. You can test your features,” she said. That kind of blunt sales-oriented language would be unheard of on Kickstarter.

Crowdfunding has enormous potential to expand entrepreneurial opportunity and reduce business risks. “We’ve actually gotten thank you notes,” said Ringelmann, “from people who were highly unsuccessful in raising money that said, ‘In three weeks I discovered that I had an idea that nobody wanted. You just saved me two years of my life.’”

But these benefits depend on recognizing this new institution for what it is: a way of taking pre-orders, not a charity pledge drive.

6. Big changes
The Reserve Bank of Australia has been looking at the economic implications of the baby boomer generation's income and spending compared with earlier periods, and with Gen X and Gen Y groups. Matt Wade has reviewed the work and looks how these age groups "have changed the Australian economy". You will find Wade's summary easier going than the RBA doc itself.

The money at the disposal of the baby boomers has contributed to a historic shift away from spending on goods and in favour of services.  In 1986, households spent about the same on goods and services. But since then, spending on goods has slumped from about half to a third of all spending, while services’ share has climbed from about half to two-thirds. This trend has coincided with the proportion of services jobs reaching a high of about 80 per cent and the share of manufacturing jobs shrinking to less than 10 per cent.

Economists call services, such as health and education, “superior goods” because as our incomes rise we spend a greater share of our resources on them. And because older people spend even more on superior goods (especially health) than other households, the consumption-hungry baby boomers have hastened the economy-wide shift away from the purchase of goods and towards services.

The boomers are going out with a blaze of spending and changing patterns of consumption and employment in the process.

7. Don't bet on a China derailment
Martin Wolf (the senior FT macro-economics guru) says only naive Western observers think that China will fail - and he is not one of them, despite China's challenges. And I reckon he is right. Wolf was in China to assess their leadership's grip on the country's situation (along with Stephen Roach - see #9 below).

Outside China, pessimism has been growing about the ability of the colossus to sustain its rapid growth. Worriers are paying particular attention to excessive capacity, investment and debt. I share the view that making the transition to slower and more balanced growth is an extraordinarily hard challenge even by the standards of those China has already met. Yet betting against the success of Chinese policy makers has been a foolish wager. When a superb horse meets a new obstacle, the odds must be on the horse. But even the best horse may fall.

8. Who gets the minimum wage?
The US Federal minimum wage is US$7.50 per hour. In a report out a few days ago, it showed that 4.3% of all workers (about 3.3 million) earn that. It also showed (page 13) that is was the lowest level since 2008. In fact it is much lower than levels in any year in the two decades from 1979 to 1999 (the test being the Federal minimum wage, not US$7.50/hour). It surprised me to read that in the early 1980's - when I was living there in my first stint - it was over 15% of all workers. Crickey, that was high. Back then it was US$3.35/hour.

I think some of the detail is interesting too: (I wonder how this compares with New Zealand.)

Age. Minimum wage workers tend to be young. Although workers under age 25 represented only about one-fifth of hourly paid workers, they made up about half of those  paid the federal minimum wage or less. Among employed  teenagers (ages 16 to 19) paid by the hour, about 20 percent earned the minimum wage or less, compared with about 3 percent of workers age 25 and older. (See tables 1 and 7.)

Gender. Among workers who were paid hourly rates in  2013, about 5 percent of women had wages at or below the prevailing federal minimum, compared with about 3 percent of men. (See table 1.) earned the minimum wage or less, compared with about 3 percent of workers age 25 and older. (See tables 1 and 7.)

Education. Among hourly paid workers age 16 and older, about 10 percent of those without a high school diploma earned the federal minimum wage or less, compared with about 4 percent of those who had a high school diploma (with no college) and about 2 percent of college graduates. (See table 6.)

9. The end of Chinese central planning
Centrally planned economies have growth targets. We are all familiar with China's current [2014] 7.7% goal, and we in the West judge them by its achievement. In fact China has a longstanding department, the National Development and Reform Commission (the NDRC), devoted to ensuring it is achieved.

But those days may be over if the comments from a much newer and more senior body of the Chinese government are any indication. A new "leading committee" is marginalising the NDRC and its members seem determined to move past such a simple goal - and be much more nuanced about economic and social progress, very much like the large Western democracies.

Stephen Roach reviews the transition at Project Syndicate:

At the start of 2013, the government announced that it was targeting ten million new urban jobs. In fact, the economy added 13.1 million workers – even though GDP expanded by “only” 7.7%. In other words, if China can hit its employment goal with 7.5% GDP growth, there is no reason for its policymakers to panic and roll out the heavy counter-cyclical artillery. That, in fact, was pretty much the message conveyed by a broad cross-section of senior officials at this year’s CDF: Slowdown, yes; major policy response, no.

Zhou Xiaochuan, the head of the People’s Bank of China, was just as emphatic on this point. The PBOC, he argued, does not pursue a single target. Instead, it frames monetary policy in accordance with what he called a “multi-objective function” comprised of goals for price stability, employment, GDP growth, and the external balance-of-payments – the latter factor added to recognize the PBOC’s authority over currency policy.

The trick, Zhou stressed, is to assign weights to each of the four goals in the multi-objective policy function. He conceded that the weighting problem has now been seriously complicated by the new need to pay greater attention to financial stability.

All of this paints China with a very different brush than was used during the first 30 years of its growth miracle.

10. Today's quote
"Business people are like sharks, not just because we're gray and slightly oily, or because our teeth trail the innards of those we have eviscerated, but because we must move forward or die."- Stanley Bing