Monday's Top 10: Under-performer; NZ is a tax haven; growth goal; Beijing big; bubble benefits; SOI; Clarke & Dawe; 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. Poor investors
We all know that China is winning the trade wars - and building up very large foreign assets from their trade surplus.

But as Thilo Hanemann is reminding us, that is only one side of the equation.

On the other side, China is losing the investment wars. Big time.

An under-valued currency helps their trade, but their closed currency system also means they have assets (foreign cash) that is performing very poorly indeed. 

Our own NZSF may earn north of a 15% return after all taxes and fees pa, but China's only earns 2% - in the same markets.

On their capital account, China has a $60 billion deficit.

Despite this hugely positive NFA position, China remains a net payer of investment income to the world. In 2013, China received income payments of $168 billion on its assets overseas, but paid $228 billion in interest to foreigners, resulting in net investment income payments of $60 billion.

The reason for these negative net income flows is the composition of China’s external balance sheet: more than two-thirds of China’s assets are reserves, which are managed by the central bank and invested in US Treasury bonds and other highly liquid securities.

As the yield on these instruments has tanked in recent years, the implied rate of return on China’s overseas assets has dropped to an average of only 3% in recent years. Foreigners, on the other hand, mostly hold FDI assets in China, which helped to sustain the implied return on foreign assets in China at 6-8% during the same period of time.

2. How lucky are we?
Every year the OECD looks at the 'tax wedge' - the total tax burden on labour income. And New Zealand has about the least burden of all these 33 developed countries.

Internationally, total taxes on wages are rising.

Maybe there is a correlation here with the great economic shape we are in at present? Thoughts below. If we want to be more like [insert your country of choice] you can check the link and see how much more tax you would need to pay to live there.

3. 'Growth is essential'
In language sure to infuriate some people hereabouts, Christine Lagarde, the managing director of the IMF said over the weekend,"The overriding topic for discussion will be the topic of growth, quest for higher growth, better quality growth, more inclusive growth and sustainable growth. We need to act now.” She said this at another high level conference in Washington DC.

At least, New Zealand is doing its bit. But our's will have almost no impact on the world as a whole, just as adopting other international trendy and fashionable policies will have no global impact either. 

Without policies to enhance growth and create jobs, inequality might intensify and tens of millions of workers might remain jobless.

“A massive global jobs gap which opened at the height of the financial crisis continues to widen and will do so in the years ahead unless growth both accelerates and is also job-rich,” said Guy Ryder, the director general of the International Labor Organization. “Creating jobs and narrowing inequalities are essential.”

4. A labour saving device
Normally we put the Clarke & Dawe video at the bottom of this posting, but today's one deserves higher treatment. They have some [good ?] advice for Glen Stevens, RBA governor. "Power is often exercised in its restraint."

5. Bigger and better
As everyone knows, Beijing is big. But it turns out, not big enough for their city planners.

They are working on a structure to make it really, really big.

That is, a city with a land area bigger than New Zealand's land mass without Otago and Southland (!), with a population bigger than Germany (!!) all in one megalopolis.

Kind of makes the term 'SuperCity' seem quaint. We are so far from the major leagues, we are not in the race. (As the good folks on Waiheke Island say, we're so far behind, we're ahead!)

6. Do bubbles finance innovation and growth?
Newsman John Cassidy was recently taken by the argument that markets need bubbles. He reports his exposure and scepticisms in his The New Yorker blog.

William Janeway ... opened the session by arguing that we need to distinguish between non-productive bubbles, such as the Dutch tulip bubble and the recent housing bubble, and productive ones, such as the tech bubble of the nineteen-nineties. In a world of chronic and irreducible uncertainty about the future - the sort that Frank Knight and John Maynard Keynes wrote about - productive bubbles are about the only way that capitalist societies can mobilize sufficient resources to invest in the technologies of the future, Janeway argued. Although these bubbles inevitably involve a lot of waste, they also bequeath many productive technologies and companies that otherwise would struggle to find financing, he said.

But isn’t most of the stuff that gets financed during bubbles junk? ... Actually, it isn’t all dreck, Ramana Nanda, of Harvard Business School, argued in his presentation. Citing some findings from a paper that he wrote with Matthew Rhodes-Kropf, Nanda said firms that get funded during bubbles are more likely to fail than those funded during normal periods, but they are also more likely to break out and be major successes. (In other words, the distribution of success is skewed towards both tails.) “It seems that riskier, more novel technologies get financed in hot markets,” Nanda told me. And, he went on, “it is not driven by a bunch of fools rushing in and, simultaneously, the good investors grabbing the best projects. Rather, even the very best investors seem to finance more novel technologies in hot markets.”

Alan Greenspan, when he was the chairman of the Fed, argued that it wasn’t the central bank’s role to pop bubbles. A better policy, he said, was to let bubbles burst on their own and concentrate on minimizing the fallout. Janeway, the author of the 2012 book “Doing Capitalism in the Innovation Economy,” said that he didn’t wholly agree with Greenspan’s non-interventionist approach. Because of bubbles’ self-reinforcing nature, they tend to get so big that, at some point. the Fed doesn’t have any choice but to step in, Janeway said. But he also argued that a bubble doesn’t have to be followed by deep recession, particularly if it is confined to the stock market rather than the credit market.

7. Oscillations
We live in a time when we have learned to fear weather changes. A lot of that is justified now that we have much more population living in at-risk areas.

These warnings tend to come in a shrill tone, and the next talking point is the coming El Nino cycle. But the best way to get these natural changes into perspectives is to find out more about it and watch the Southern Oscillation Index - a variation in pressure between Tahiti and Darwin. It is something watched worldwide and presages weather changes in New Zealand as well.

8. Pay transparency
Advocates for pay disclosure typically focus on the advantage it gives to women in negotiating for equal pay. But new research suggests that companies might be the real winners. Emiliano Huet-Vaughn, an economics PhD candidate did the work and reports on the somewhat surprising outcomes.

What I found was that people in the group shown their relative earnings position were more productive than those that weren’t given that information. In fact, the work output of those in the informed group increased by about 10 percent after they learned their relative positions.

Why did pay disclosure increase productivity? We’re not sure, but the answer may be that people care about their position relative to their coworkers. We may work harder even if we don’t see a raise if we know that we’re doing well compared to our peers. Workers may care about the level of their earnings not only because it lets them buy goods and services, but because it also lets them know where they stand in their peer groups, giving them an internalized sense of status.

Normally a productivity jump of the size I found would be significant for any business, not to mention, hard to come by. But these gains were made simply by giving workers information, yielding greater firm output without increases in wages, and, thus, potentially greater tax revenue without increases in tax rates. This is one potential advantage to pay transparency, quite different than the rationale that pay transparency is a plus because it can reduce the pay gap between male and female workers.

9. Something practical
Academic economists are enamored with the recently published tome by French economics professor Thomas Piketty. As we have noted in this column before, Piketty has added the evidence and armour to the inequality debate, far more so that the lightweight, political and flawed The Spirit Level. Bravo to Piketty, I say.

But while the analysis may be impressive, there is still a problem. Piketty proposes solutions that are hardly likely to be picked up by policy makers.

But Yale professor Robert Shiller has dusted off a 2003 book he wrote on the subject which offers some practical measures any country could take.

(Why is it often Europeans who have the 'original' idea, but American who make it work ?)

Today, though, there are some possibilities that might alleviate, at least partially, any increasing inequality in future years.

In testimony before the Senate Finance Committee last month, Mr. Burman proposed a version of inequality indexing that might be politically acceptable today. His idea was to integrate inequality indexing with inflation indexing: Instead of just linking tax brackets to inflation as measured by the Consumer Price Index, as we have done for years, he proposed that the adjustments also take account of rising inequality, if it occurred. He proposed a system to offset the loss in tax revenue that inflation indexing would produce, in a way that would get us closer to a target distribution of after-tax income; if inequality worsened, higher tax brackets would bear a bit more of the burden, and people at the bottom would bear less.

A relatively minor change like this should be politically acceptable. It is a reframing of inflation indexing, which is already a sacrosanct principle, and would be revenue-neutral. By 2025, Mr. Burman argued, it could pay for a doubling of the earned-income tax credit, “with more than $100 billion left over to adjust middle-income tax liabilities.”

Such a plan would be a nice first step toward making our tax system manage the risk of future increases in inequality.

10. Today's quote
"Formal education will make you a living; self-education will make you a fortune." - Jim Rohn