A better carbon tax; cars as fat cells; Kiwi cows to China; spike in consumer credit demand; the world’s most lucrative shakedown operation; the less you know, the more you make; Dilbert & more

Here's my edition of Top 10 links from around the Internet today.

We 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. Getting it right
Although they bitterly fought Tony Abbott and his moves against the Australian carbon price scheme, some environmentalists are now looking at alternative approaches.

Some even think Abbott has cleared the air to allow for an even better system.

They are proposing a new system that can set a high enough price on carbon to prompt serious economic transformation while genuinely telling people they won't be worse off as individuals.

In fact, if you adjust your carbon-use behaviour you could be better off.

Warwick Smith points to this third (better?) alternative:

There's another alternative that is often referred to as a tax and dividend system (or fee and dividend if you think tax is a dirty word).

The idea is pretty simple, you set a tax rate, say $10 per tonne CO2e, which climbs by $10 each year for maybe 10 years. This tax is charged on all fossil fuels (and other emissions wherever practical), and then you give all of that money back to households. The tax could be rebated at the border for exports.

The result is a significant price rise in commodities that are greenhouse gas intensive but also a significant rise in income for all Australians. People will be able to continue to live exactly the way they were if they so choose and be no worse off. However, if they make consumption decisions that reduce their emissions they will be substantially better off, particularly if they are ahead of the pack.

Such a system would quickly result in a price high enough for renewable energy to outcompete fossil fuel energy. This won't mean the immediate death of coal and gas because we simply don't have the capacity to replace it that quickly. However, it does guarantee that new renewable projects will have a market and the genuine and rapid transition to a fully renewable energy sector will begin.

2. The new age of cars
Is the world about to develop a nervous system, in which cars become our fat cells? That's the intriguing idea being put forward by analysts at UBS. They are marveling at the rapid fall in the cost of solar panels at a rate even their boosters didn't predict. Much of that has come from efficiencies of scale in their manufacture. The next advances will come from the efficiencies in the solar cells themselves.

But with all this new electricity production, where will it be stored?

Well, our cars could have that capacity. We all need one and they are much more effective and reliable than public transport. They go where you need, when you need to. One day (soon?) they may even be driverless. But they are idle about 70%+ of the time, so electric cars are a great candidate.

But its a pity that the government owns the electricity systems. That means we will be very slow to allow solar, and find anti-innovation regulatory blocks on allowing distributed electricity distribution. The government has made a huge mistake keeping 51% of the SOE gentailers. Without that noose, they wouldn't be facing huge asset write downs. Only the backwards-looking opposed the electricity industry sell-down. The forward-looking can see the writing on the wall. (That is, like KiwiRail, NZ Post.) The smart grid will revolutionise our use of energy.

This from the UBS report:

The new decentralised electricity world will only work in a smart grid environment. Collecting and analysing data from millions of electricity users will optimise the grid and reduce grid cost. The benefits to the system could amount to €50bn p.a., on our estimates, thanks to (1) lower and more intelligent consumption (peak shaving); (2) a reduction in theft/losses; (3) lower opex and maintenance capex; (4) lower back-up capacity needs and avoided replacement of thermal capacity; and (5) lower carbon emissions. In the context of EVs, smart grids could provide the technical basis for innovative solutions.

For example, an EV could have a personalised ‘ID’ for charging/discharging, no matter where it is hooked up to the grid. The EV could be charged on a company parking lot with solar power from the owner’s rooftop panels at home while the owner is at work during the day. The utilities would charge the customer for the grid use and the metering/billing services. This would reduce the amount of stationary battery capacity required at home.

Electricity demand is set to become smart in both the household and commercial/industrial segments. Demand will be much better aligned with the available supply, and it will minimise cost to electricity users and the entire system. Demand-side response – that is, large electricity users cutting demand at peak times and getting compensated for that by grid operators, will be a commonly used tool to keep the system in balance. Smart grids will be the enabling technology for this response. As a result, peak demand should be greatly reduced (as should the need for back-up power stations).

3. "A win-win" Really?
Fonterra is not only expanding its distribution systems in China, its farm operation there is working hard to expand local production. It is building its herd quickly with cows imported from New Zealand. Does taking them out of the local supply just raise domestic prices? TVNZ has this report:

Nearly 11,000 in-calf dairy cows arrived by sea, bound for Fonterra-owned farming hubs near Beijing.

The Fonterra-owned cows left New Zealand in late July and as the company looks to expand its operations in China more animals are getting ready to head that way.

More calves have been bred especially for Chinese conditions and will leave when they are carrying calves of their own at around two years old.

"It's actually a win-win. It's helping grow the industry and create more demand for New Zealand milk," farmer and Fonterra director Ian Farrelly said.

And with 11,000 Kiwi cows already docked in China those in the industry are confident there's room for more without creating competition for New Zealand farmers and milk products.

"The economy over there is growing so quickly, there's something like 60,000 babies born a day, half of them are born in the city and most are bought up on milk," Mr Farrelly says.

4. That sinking feeling
The euro zone was supposed to usher in prosperity without the need for anything painful. It is a uniquely 'euro-socialist' project where everyone is supposed to benefit from the hard work and savings of "someone else". The EU is soft and has been for a very long time, captured by bureaucrats and apple-pie rhetoric, and is now paying the price. If Germany, France and Italy cannot find a way to refloat Europe’s economy, the euro may yet be doomed, says The Economist.

What started more than four years ago as a banking and sovereign-debt crisis has decayed into a growth crisis that is now enveloping the three biggest economies. Germany is teetering on the edge of recession. France is mired in stagnation. Italy’s GDP is barely above its level when the single currency came in 15 years ago. Since these three countries account for two-thirds of euro-zone GDP, growth in places like Spain and the Netherlands cannot make up for their torpor.

The underlying causes of Europe’s new ills are three very familiar and interrelated problems. First, there is a shortage of political leaders with the courage and conviction to push through structural reforms to improve competitiveness and, eventually, reignite growth: the big countries have wasted the two years bought by Mr Draghi’s “whatever it takes” commitment. Second, public opinion is not convinced of the urgent need for deep and radical changes. And third, despite Mr Draghi’s efforts, the monetary and fiscal framework is too tight, throttling growth - which makes structural reforms harder.

5. I want it now
Consumer credit levels might have come in pretty flat in July, according to the latest RBNZ data but the data is interesting all the same. They are $14.3 bln and that is lower than the $14.8 bln they reached in March 2008. The interesting bit is the rate of growth; they are up +6.3% on a year ago. And that is the fastest rate of growth since early 2006. What we are measuring here is the rate of demand for credit card debt, installment credit, hire purchase, personal loans, car loans, and store credit. These are among the highest cost borrowing a consumer can do.

6.3% growth in July is a much faster pace than we are seeing from the rural sector (+3.5%), the business sector (+4.2%), or even the housing sector (+5.0%).

But it is not as fast as households are increasing their bank deposits (which includes term deposits and savings accounts). They are increasing at an +8.3% rate.

And if we note that bankruptcies and insolvencies are now back at record lows, it seems to me that these consumer credit growth numbers indicate consumers are feeling unusually optimistic about their own immediate prospects. Be careful out there folks. If you are paying double-digit interest rates, that probably indicates its not a very good deal.

6. Good and bad inequality
Gareth Morgan may be a lone voice in New Zealand saying it is equality of opportunity that is important, not aiming for equality of wealth or income. But he has some support from Nobel-winning Michael Spence. Spence is very worried by the impacts of inequality, but is trying to find the right policy responses from here, where we find ourselves now.

For him, intergenerational mobility is the key. Growth makes policy choices easier, but if we don't have it, what is is the right policy response?

So where does that leave us? For me, the high-priority items are fairly clear. In the short run, the top priority is income support for the poor and the unemployed, who are the immediate victims of crises and the underlying imbalances and structural problems, which take time to remove. Second, especially with rising income inequality, universal access to high-quality public services, particularly education, is crucial.

Inclusion sustains social and political cohesion – and hence the very growth needed to help mitigate the effects of rising inequality. There are many ways for economies to fall short of their growth potential, but under investment, especially within the public sector, is one of the most potent and common.

7. Cyber attack without fraud
The war in the Ukraine and the resulting sanctions are all expected to escalate over the next few weeks. That means an increase in the cyber-war between the West and Russia. For us, that means the banking systems will be under attack. And that sort of threat can easily affect us in New Zealand. Over the weekend (a holiday weekend in the US), it seems that US banking systems are under some sort of attack from Russia. Brace yourself.

The attacks on banks have come from many fronts, but who might be behind the latest wave and how they found security holes remained under investigation.

Tom Kellermann, chief cyber security officer at Trend Micro Inc., was among those who believe the attacks are linked to sanctions the U.S. levied on Russia over its actions in the Ukraine.

Trend Micro, which counts large financial institutions as clients, recently reported that banks have been enduring an upswing in attacks since those sanctions came down. The most significant was a breach of the European Central Bank's network in July.

"Geopolitics will serve as a harbinger of cyber attacks in today's age," Kellermann said. "For all of these people in Washington — the FBI and Secret Service — to work this hard together ahead of a long weekend suggests something unprecedented is awry."

8. An extortion racket?
Do you cheer when a giant corporate (like a big bank) is forced into a large and expensive settlement for some really dodgy behaviour? I do, although I am often unsettled by the lack of an admission of guilt, the lack of prison sentences, of the sense that these fines become just the cost of doing business. But basically, I like it that accountability is being exerted.

But The Economist sees it in a different way. It says companies must be punished when they do wrong, but the American legal system has become an extortion racket:

Who runs the world’s most lucrative shakedown operation? The Sicilian mafia? The People’s Liberation Army in China? The kleptocracy in the Kremlin? If you are a big business, all these are less grasping than America’s regulatory system. The formula is simple: find a large company that may (or may not) have done something wrong; threaten its managers with commercial ruin, preferably with criminal charges; force them to use their shareholders’ money to pay an enormous fine to drop the charges in a secret settlement (so nobody can check the details). Then repeat with another large company.

The amounts are mind-boggling. So far this year, Bank of America, JPMorgan Chase, Citigroup, Goldman Sachs and other banks have coughed up close to $50 billion for supposedly misleading investors in mortgage-backed bonds. BNP Paribas is paying $9 billion over breaches of American sanctions against Sudan and Iran. Credit Suisse, UBS, Barclays and others have settled for billions more, over various accusations. And that is just the financial institutions. Add BP’s $13 billion in settlements since the Deepwater Horizon oil spill, Toyota’s $1.2 billion settlement over alleged faults in some cars, and many more.

In many cases, the companies deserved some form of punishment: BNP Paribas disgustingly abetted genocide, American banks fleeced customers with toxic investments and BP despoiled the Gulf of Mexico. But justice should not be based on extortion behind closed doors. The increasing criminalisation of corporate behaviour in America is bad for the rule of law and for capitalism.

9. "If they can't afford our products ..."
Robert Reich, long-time labour economist (in fact so long, I studied his work when I was at graduate school in the US) says business leaders are increasingly worried about income inequality. He says they realise that their companies and capitalism are at stake. Unless the middle class becomes stronger and more confident, businesses could face more financial trouble. 

These business leaders know the US economy can’t get out of first gear as long as wages are declining. And their own businesses can’t succeed over the long term without a buoyant and growing middle class.

They also recognize a second danger.

Job frustrations are fueling a backlash against trade and immigration. Any hope for immigration reform is now dead in Congress, and further trade-opening agreements are similarly moribund. Yet the economy would be even worse if America secedes into isolationism.

Lloyd Blankfein, CEO of Goldman Sachs, warned recently on “CBS This Morning” that income inequality is “destabilizing” the nation and is “responsible for the divisions in the country.” He went on to say that “too much of the GDP over the last generation has gone to too few of the people.” 

10. The value of human capital
Engineers and scientists will never make as much money as business executives. Now a rigorous mathematical proof that explains why this is true:

Postulate 1: Knowledge is Power.
Postulate 2: Time is Money.

As every engineer knows,

Work
---------- = Power
Time

Since Knowledge = Power, and Time = Money, we have

Work
--------- = Knowledge
Money

Solving for Money, we get:

Work
----------- = Money
Knowledge

Thus, as Knowledge approaches zero, Money approaches infinity regardless of the Work done.

Conclusion: The Less you Know, the more money you Make.