Friday's Top 10 with NZ Mint: How some plutocrats call charitable donations 'self taxation'; 'Tax shouldn't just be for little people'; Japan set for unlimited money printing too; Clarke and Dawe

Here's my Top 10 links from around the Internet at 2 pm in association with NZ Mint.

As always, we welcome your additions in the comments below or via email tobernard.hickey@interest.co.nz.

See all previous Top 10s here.

My must watch is #6 explaining the flaws in China's growth strategy.

1. Ayn Rand made an awful lot of money for some people - The deregulations that swept economies, financial markets and banking systems around the world in the wake of the Libertarian push to deregulate in the mid 1980s had a few effects.

One was to massively increase the pay of bankers relative to other executives, let alone other workers.

This Quarterly Journal of Economics paper by professors Thomas Philippon and Ariell Reshef nails down just how much of an increase happened since the late 1980s and how it can't be explained away by education or pay rises for executives generally.

The paper also looks at the contribution of bankers to the problems of inequality.

How long before the public demand the re-regulation of banking?

Globally, and in New Zealand.

Here's BusinessInsider's take on the report:

In particular, they identify the relaxing of the Glass-Steagall act in 1987 as the catalyst to the wage explosion. Relaxing the law, they write, "changed both the organization of investment banking and competition within the sector and therefore should have a bigger impact."

2. Demographics explain practically everything - Derek Thompson at The Atlantic has written this headline and I agree with him. It explains the bond rally of the last decade. It explains the secular shift out of equities. It explains rising health care costs. It explains a reluctance to invest in new capacity.

Here's Thompson and a couple of great charts:

Why is this recovery different from all others? Demographics, of course. New car sales rely on a burst of activity from 20somethings. Twentysomethings were the hardest hit demographic in the country, with the highest unemployment and worst income drop on top of student debt.

The most important economic story of the next generation is health care. You can get a good feel for why costs and employment in the medical industry are rising in graphs (3) and (4), respectively. As the Boomer generation moves right along the X-Axis of Life, national spending on drugs will boom along with demand for personal health aides. As health care adds more people (as other industries, like retail, make do with fewer), costs will rise faster than inflation, putting pressure on the government's ability to pay for our seniors' care from a smaller base of taxpayers.

(Bonus!) 2. Voters, not tycoons, should set priorities - So says Chrystia Freeland, who wrote 'Plutocrats: the rise of the new global super-rich and the fall of everyone else', in this New York Times piece.

She points to a practice some charitable donors call 'self taxation'.

Charity is a virtue -- and it is one of the great, traditional strengths of U.S. civil society. The problem is that as the gap between the rich and everyone else increases, among the super-elite there is a creeping temptation to conflate charity with taxation. This idea is captured in a term Foster Friess, the wealthy Wyoming philanthropist and conservative political activist, coined in an interview with me: the self-tax.

"People don't realize how wealthy people self-tax," Friess replied, when I asked whether taxes on the rich should rise. "You know, there's a fellow who was the C.E.O. of Target. In Phoenix, he's created a museum of music. He put in around $200 million of his own money. I have another friend who gave $400 million to a health facility in Nebraska or South Dakota, or someplace like that. You look at Bill Gates, just gave $750 million, I think, to fight AIDS."

"I think we should get rid of taxes as much as we can," Friess explained. "Because you get to decide how you spend your money, rather than the government. I mean, if you have a certain cause, an art museum, or a symphony, and you want to support it, it would be nice if you had the choice to support it. Where we're headed, you'll be taxed, your money taken away, and the government will support it."

3. 'Tax shouldn't just be for little people' - John Kay, who recently wrote an excellent report on short termism in corporate governance, has written a nice piece here on the implications of multinationals gaming international tax systems. He wants a global agreement.

The repeated revelations that many major companies pay little or no tax, even if they do so by legal means, fuels a public sense that tax is mainly for little people. We need only look at Greece to see how socially, politically and economically corrosive that perception can be.

4. Plan C no better than Plans A or B - So says Bloomberg in this editorial on the latest Greek bailout fudge.

The agreement assumes that Greece will largely grow its way out of the problem, reducing its debt to less than 110 percent of GDP by 2022 even as it endures the crushing austerity required to sustain a budget surplus of 4 percent of GDP. In other words, this is just the latest in a long line of stopgap measures to fend off the kind of disorderly default and euro exit that could trigger contagion in the much larger economies of Spain and Italy.

The contortions might be necessary to help the deal get through the various national parliaments that must ratify it, but they could extract a higher price down the road. Some euro- area countries, for example, will now be paying more to borrow money than they receive in interest from Greece. That’s a fiscal transfer by sleight of hand, as is the 10-year extension of some debt maturities and a repayment holiday on loans that the European Union and the IMF pledged earlier this year. Perversely, much of the burden will fall on countries that are also in economic trouble. Italy and Spain, for example, will have to pay Greece for the privilege of lending to it, because their financing costs are higher than the reduced interest rate at which Greece will borrow.

5. Bank of Japan set for unlimited money printing too - Japan is set for an election that could result in the Bank of Japan being completely stripped of its independence and forced to try to print money in an unlimited way to try to dig the economy out of deflation and create inflation of something like 3%.

So by early next year we could have the US Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England all simultaneously printing money to buy government bonds...

One of the candidates to be the next BoJ Governor has advocated money printing to buy foreign government bonds to force down the yen. That would be entertaining. The Bank of Japan could be buying New Zealand Government bonds next year to push down the value of the yen vs the New Zealand dollar. Sigh. And yet we still think everyone is playing by the rules of the game and if we step out of line we will lose credibility...

Here's David Pilling at FT.com with an analysis of what the Japanese might do:

Shinzo Abe, a former prime minister, is poised to return to the job if his party wins next month’s election. Mr Abe has set the cat among the pigeons – or, in monetary policy terms, the doves among the hawks – by proposing some radically new thinking. He wants the government to set an inflation target – he initially suggested 3 per cent – and for the central bank governor to be held accountable if that goal is missed.

To reach the target, he says the BoJ should pursue “unlimited” monetary easing. Mr Abe has rowed back somewhat in recent days, especially from his ideas that the bank should buy construction bonds. He maintains, however, his threat to amend the Bank of Japan Law if the bank does not co-operate. He has been lambasted for his supposed assault on central bank independence. Yet there is much merit in his position.

Several candidates have been mentioned for governor. Among the more interesting are Heizo Takenaka, economics tsar under former prime minister Junichiro Koizumi, and Kazumasa Iwata, a former deputy governor who advocates stronger anti-deflationary measures and the purchase of foreign bonds to drive down the yen.

6. The risky strategy behind China's construction economy - Here's Lynnette Ong at Foreign Affairs pointing out local governments fund a lot of their activities by selling the rights to use land.

Financing the Middle Kingdom's recent building boom has been expensive: Estimates put local government debt alone at between $800 billion and $2 trillion, or around 13 to 36 percent of GDP. If the real estate bubble pops, financial and social crises will follow.

Underwriting the impressive facade, however, is an incredibly risky strategy. Governments borrow money using land as collateral and repay the interest on their loans using funds they earn from selling or leasing the same land. All this means that the Chinese economy depends on a buoyant real estate market to keep grinding. If housing and land prices fall dramatically, a fiscal or banking crisis would likely soon follow. Meanwhile, local officials' hunger for land has displaced millions of farmers, leading to 120,000 land-related protests each year.

The recklessness can be traced to two things: First, local Chinese officials are evaluated for promotions and other rewards based on how well the economy they manage performs. Construction and real estate activities are among the most straightforward ways to stimulate growth. White-elephant construction projects thus offer eager officials a perfect opportunity to impress their political superiors, even if massive developments do not necessarily make any economic sense. Take, for example, the city of Ordos in Inner Mongolia: Its elaborate urban infrastructure and its sea of new flats and office blocks are nearly all unoccupied, making it China's largest ghost city.

Another factor was China's fiscal recentralization reform of 1994, in which the central government raised its own revenue by taking back power from local governments to levy some major taxes. The move lowered local governments' revenues but left their financial responsibilities -- providing education, health care, subsistence allowances, and pensions -- unchanged. So local officials had to find other ways to generate money.

7. And the IMF is warning about it too - Reuters warns that China's growth is too dependent on excessively high investment levels.

The potential for severe internal economic imbalances in China stemming from an extended period of investment-driven growth, plus the risk that the excess capacity it creates spills into the global economy, are a recurring theme of IMF research. A rise in fixed asset investment spending has helped underpin a rebound in China's economic growth in recent months, after seven successive quarters of slowing expansion - the worst run since the depths of the global financial crisis.

The report added that by its calculations, a sustained period of over-investment meant that China now required ever higher investment to generate the same amount of growth, forecasting that investment's share of GDP could soar to 60-70 percent from current levels around 50 percent.

"Under such a strategy, vulnerabilities will likely grow in the form of hidden deadweight that will have to be paid in future in one form or another. The cost of financing such an elevated level of investment could undermine overall economic stability," it added.

Whether those vulnerabilities would eventually erupt into a full-blown funding crisis was far from clear, the IMF research said, particularly given China's heavy use of household savings, rather than external financing, for investment spending.

8. Australian slowdown - CNBC reports Rio Tinto plans to cut costs by US$5 billion over the next two years to adjust for a slump in commodity prices after the slowdown in the Chinese economy. This will reduce demand for New Zealanders looking for jobs in Australia. It's also making a decision soon on whether to close Tiwai Point.

Rio has been cutting costs, reviewing other projects and closing coal mines in Australia due to slumping commodity prices, soaring costs and the persistently strong Aussie dollar.

"We are taking further tough action to roll back the unsustainable cost increases of the past few years and are maintaining a relentless focus on improving productivity," Rio Chief Executive Tom Albanese said in notes for an investor seminar.

9. Affordable housing solution? - Why not use our strong New Zealand dollar to buy flat pack housing from Britain for NZ$20,000 each? That's the suggestion from Alistair Helm at Properazzi. He's being a bit cheeky, but still...

There is no way that this could be considered a livable house or that you would not need appropriate consents and approvals as well as connected utility services. However I think there is a bigger point to be made here than just a bit of a light hearted headline “Is this the answer to the #HousingCrisis? £9,999 flat-pack from Tesco”Why is it that in a country that produces so much construction lumbar and ships it in raw logs overseas can we not turn our hand to creating this type of solution? There are certainly sleepouts and cabins for sale in NZ.

This is a product which demonstrates what can be achieved when you apply modular design with mass production techniques. The massive population markets of Europe make this a possible solution to be made in the UK, but could we not apply the techniques to our geography and build and export a similar higher spec version complete with services for less than $100k?

This cabin is not the solution to NZ housing crisis or affordability issue but it should be viewed more as a lightening rod  to challenge and stimulate thinking about the issue with a new pair of eyes.

10. Totally Clarke and Dawe