Tuesday's Top 10 with NZ Mint: The end of middle class growth; Chinese Ponzi schemes emerging; How Google used the Double Irish and Dutch sandwich to pay 3.2% of profit as tax; Dilbert

Here's my Top 10 links from around the Internet at 10 am 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 read is #1. I hadn't really thought how uneducated young men are the big losers.

1. The end of middle class growth - Here's The Atlantic on what it means for the future of work, family and the economy.

This is an excellent article summarising many of the problems in the world's largest economies.

Many of the same trends are evident here.

How are we going to reconnect productivity growth with middle class wages?

The Atlantic has a few sober thoughts.

This is the debate we should be having.

For decades, productivity and compensation rose in tandem. Their bond was the basis of the social compact between the economy and the public: If you work harder and better, you and your family will be better off. But in the past few decades, and especially during the past 10 years or so, the lines have diverged. This is slippage No. 1: Productivity is rising handsomely, but compensation of workers isn't keeping up.

Notice that recessions and expansions barely register in the trend lines. Long-term, gradual forces, rather than short-term jitters, are at work. Charts 2 and 3 hint at what those might be. Chart 2 shows how much wages (not compensation, this time) have grown for workers in different income brackets. The higher you stood on the income ladder, the better you did; the highest-paid 1 percent of earners soared above and away from everyone else, practically occupying an economy of their own. By contrast, the bottom 90 percent of earners--which is to say, almost everyone--saw barely any increase, and much of what they did see came in the boom years of the late 1990s.

So, productivity is rising, but it isn't being evenly allocated; the top is effectively disconnected from the rest of the spectrum--slippage No. 2. One reason, especially pronounced in the past decade or so, is that fewer of the productivity gains are flowing to workers, and more are flowing to investors.

The article also makes an interesting point about young, poorly educated men becoming 'lost' from the workforce. In America a third of men who didn't finish high school are now not working.

Men's withdrawal from work, as the chart shows, isn't cyclical; it doesn't recover after downturns. Here, then, is slippage No. 3, arguably the most consequential: the decoupling of less-skilled men from jobs.."

If you are out of the workforce, economic growth can't reach you, at least not directly. You might live off a girlfriend, receive welfare or disability payments, or dip in and out of the underground economy. But the performance of the economy as a whole becomes largely irrelevant. "A lot of these people will never work again," said Looney at Brookings. "Less-skilled workers are falling so far behind that they are going to place a huge strain on the social safety net in the coming decades."

2. American trucking volumes have just slumped - Most people think the US economy is coming back to life, albeit with the threat of the fiscal cliff.

This chart from the American Trucking Association (ATA) tracking seasonally adjusted trucking volumes suggests something else.

“Clearly Hurricane Sandy negatively impacted October’s tonnage reading,” ATA Chief Economist Bob Costello said.  “However, it is impossible for us to determine the exact impact.”  

Costello noted that a large drop in fuel shipments into the affected area likely put downward pressure on October’s tonnage level since fuel is heavy freight, in addition to reductions in other freight. 

“I’d expect some positive impact on truck tonnage as the rebuilding starts in the areas impacted by Sandy, although that boost may only be modest in November and December,” he said. “Excluding the Hurricane impacts, I still think truck tonnage is decelerating along with factory output and consumer spending on tangible-goods.” 

3. Chinese Ponzi schemes? - Elva Muk at Asian Investor reports on an investor protest over what appears to be a Ponzi scheme at one of China's shadow banks.

Concerns are growing about a potential ponzi scheme in China after investors protested at a branch of Huaxia Bank in Shanghai this week over products they claim have failed to pay out.

They were structured as limited partnership funds that took private equity stakes in auto companies and pawn shops, with investors promised a yield of 11% after one year for a minimum initial outlay of Rmb500,000. They were due to pay out at the end of November.

These particular funds were issued and managed by Commercial Finance Asset Management, although the investors claim they bought them at the Jiading branch of Huaxia Bank. the case has caused wider concerns about the largely unregulated sale of so-called “wealth management” products, which last year racked up Rmb17 trillion ($2.7 trillion) in China and is on course for a similar sum this year. It is understood there are as many as 2,000 such products, with tenors ranging from three months to two years.

4. Is China over-investing and does it matter? - Here's the IMF paper on the subject

The conclusion is China is over-investing, but consumers who don't vote are paying for it so it's not a problem...

Now close to 50 percent of GDP, this paper assesses the appropriateness of China’s current investment levels. It finds that China’s capital-to-output ratio is within the range of other emerging markets, but its economic growth rates stand out, partly due to a surge in investment over the last decade. Moreover, its investment is significantly higher than suggested by cross-country panel estimation. This deviation has been accumulating over the last decade, and at nearly 10 percent of GDP is now larger and more persistent than experienced by other Asian economies leading up to the Asian crisis.

However, because its investment is predominantly financed by domestic savings, a crisis appears unlikely when assessed against dependency on external funding. But this does not mean that the cost is absent. Rather, it is distributed to other sectors of the economy through a hidden transfer of resources, estimated at an average of 4 percent of GDP per year.

5. Google's search for tax havens - Bloomberg reports on how Google reduced its tax bill by US$2 billion. It paid a tax rate of 3.2% on profit earned overseas.

Google Inc. (GOOG) avoided about $2 billion in worldwide income taxes in 2011 by shifting $9.8 billion in revenues into a Bermuda shell company, almost double the total from three years before, filings show. By legally funneling profits from overseas subsidiaries into Bermuda, which doesn’t have a corporate income tax, Google cut its overall tax rate almost in half. The amount moved to Bermuda is equivalent to about 80 percent of Google’s total pretax profit in 2011.

The Internet search giant has avoided billions of dollars in income taxes around the world using a pair of tax shelter strategies known as the Double Irish and Dutch Sandwich, Bloomberg News reported in 2010. The tactics, permitted under tax law in the U.S. and elsewhere, move royalty payments from subsidiaries in Ireland and the Netherlands to a Bermuda unit headquartered in a local law firm.

Last year, Google reported a tax rate of just 3.2 percent on the profit it said was earned overseas, even as most of its foreign sales were in European countries with corporate income tax rates ranging from 26 percent to 34 percent.

6. Twin mistresses - The corruption crackdown in China that uses mistresses as the proof is underway in earnest. Isn't the Internet a wonderful thing.

A police chief in northwest China has been removed from the post as he is being investigated for allegedly keeping a pair of twin sisters as mistresses, local authorities confirmed Sunday.

Qi Fang, director of public security bureau of Wusu City, Xinjiang Uygur Autonomous Region, has been embroiled in the sex scandal since earlier this week. He was sacked on Saturday, the Tacheng prefecture committee of the Communist Party of China (CPC) announced.

Qi was accused of abusing power to give jobs to twin sisters he has been keeping as mistresses. The informer's post and the photo of two scantly-clad girls in bed quickly became a hit before they were removed from iyaxin.com, one of the largest Internet portals in Xinjiang.

7. Japanese style paralysis - China is headed this way, according for former Chinese-based hedge fund manager Jack Rodman in Quartz.

At the end of 1989, Japan’s bubble economy burst and its economic miracle came to an abrupt end. The Nikkei exchange fell from nearly 40,000 to its current 10,000 range. Over the course of 20 years, what appeared to be “unstoppable” economic growth proved to be anything but.

Today, China, in some ways, appears to be closer to following Japan than to sustaining its own economic miracle. China’s Shanghai Index (stocks) has fallen from a high of 7,000 in 2007 to a low of 2,000 for the past few years, and Chinese domestic investors have little confidence in their domestic stock market. The Japanese bubble, and its aftermath, was the result of a series of domestic financial and economic imbalances, many of which China faces today—to varying if not greater degrees:

º   High growth rates fueled by credit-backed investment and artificially low interest rates

º   Increasingly misallocated investment, which created unnecessary manufacturing capacity, and infrastructure and real estate development

º   Reliance on large trade surpluses to balance excessive manufacturing capacity with low domestic consumption

8. Some good news! - Here's GE's Chief Economist Marco Annuziato arguing at VoxEu that the age of the Industrial Internet will boost productivity.

Today’s technological innovation is regarded by many as all about social media and entertainment, with no impact on economic growth. This column argues that such scepticism is premature. A closer look at selected industries suggests that the ‘industrial internet‘ – a network that binds together intelligent machines, software analytics and people – through accelerated adoption of sensors and software analytics, will have a powerful impact on productivity and growth.

9. Stiglitz is right - Here's his view on what America should do. I agree with him.

The financial system's focus must shift from speculative and proprietary trading to lending and job creation

10. Totally Jon Stewart on Kate Middleton's pregnancy...



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Regarding Item 1
The thing that countires like NZ are not currently trying is 'Free markets and Competition'. The move by The Warehouse shows once again that NZ has no interest in Free markets and Competition, or if  we do we have no clues at all about what the terms mean nor what an economy that has Free markets and Competition would look like.
The reason that Freemarkets and Competition are important - really important is that they are expensive, hard, difficult places to be, they are not efficient ( economic efficiency is a myth at best) What they do however is emply a lot of people and as part of the process bring prices down choice up quality and service up.
We don't have many sectors with Freemarkets and competition because
1. many of them are not suited due to technology and other reasons
and more importantly
2. Companies hate Freemarkets and Competion for the very reason that they are great for the economy and great for society, they are expensive, risky, tough places to operate.
So Companies buy each other up, by up smaller players, restrict competition every way they can because it is in there interest to do so.
I strongly believe that the reduction in the Middle class has more to do with lessening competition than with any other factor- technology changes included and that if we want the economy to boom then let a million experiments in capitalism happen free from entrenched interest groups, rent seekers, monopolists etc.

PlanB - nup.
Wealth is tha ability to buy bits of the planet.
Double the consumers, halve the wealth-per-head available.
Supply those bits of the planet with a finite energy source (a bit of the planet in itself) and get to the half-way chew-through that, the wealth-deliverable per-head has to be curtailed too.
Been going on exponentially to date, that process, but it couldn't go forever.
The 'middle class' may think they're getting 'wealthier', but much in recent times has been trading-up-numerically, existing things (think houses). The numerical 'gain' obscured the real-wealth loss. The sponge is nearly wrung-out now - and much of the imagined wealth remaining is not underwritten (nor ever will be).

PDK : Nup , Plan B is correct . Wealth is freedom , freedom to trade , freedom to live your life on your terms .......
..... buying " bits of the planet " is seriously drippy thinking , dude ....
Wealth is having an abundance of innovative and inspirational ideas , it is creativity and entrepreneurship...
.... buying bits of the planet ..... dearie me , so 1960's fella ! 

I see you have come back none the wiser....

We must not panic. There are plans to mine the moon. 
Maybe - just maybe - GBH will be able to leave a little of something for his grandchildren

"By legally funneling profits from overseas subsidiaries into Bermuda, which doesn’t have a corporate income tax, Google cut its overall tax rate almost in half. ........ The tactics, permitted under tax law in the U.S. and elsewhere, move royalty payments from subsidiaries in Ireland and the Netherlands to a Bermuda unit headquartered in a local law firm."
Clearly the redistribution police dont like this, even though said companies are playing by the rules.

Neither should NZ owned and operated companies like it.  In effect they cannot do this so pay 30% tax....therefore they are at a huge dis-advantage....hence google etc need to be taxed at the same rate.

Google isn't the only tax rort.  New Zealand landlords should be upset as well.  Own NZ residential property, live in Hong Kong and register the company in Singapore.  Big dollar tax rort in that.  Our Government should be on to it.  Oh.  It's Peter Dunne - explains a lot. 

That maybe why the IRD is saying a residence is a permanent place of abode, so pay NZ tax, even if you dont live here.

anyone else read this on food stamps in the USA, its tough over here, retail is back on last year, according to the shop workers.

The few shop ppl I talk to here in NZ say its been a quiet year.  Just why our beloved RB thinks un-employment will be back down to 4.9% in two years eludes me......

All markets are managed, always have been. What they look like is the choice we make as a society. 
We have chosen to financialize the economy and commoditize labour and industry. The result is what we see around us.
Or to put it another way, income has polarized over the last few years as industry and labour have been usurped by a financial economy that is supported by central banks globally. 

Nice article explaining the behaviour of our big 4 accounting firms and the harm they do to society at large

One radical suggestion is that the National Audit Office should take charge of all big company auditing itself, paid by a levy according to company size: it would protect shareholders from inadequate audit and taxpayers from avoidance. Banks are still receiving clean audits, despite the governor of the Bank of England declaring them to be zombies paralysed by undeclared bad debt.
Corporations, banks and auditors would love that wouldn't they! A bit of sunlight and transparency would be better for investors and the taxpayer

Great piece on the fiscal cliff and why the problem has not gone away, Steve Keen at his best IMHO.

Yeah the idea that govenments can balance the books with credit money is wierd. They aren't seashells they are iou's. They are simply moved around with interest accruing continously.
This fiscal cliff is a trojan horse to rob what is left of the new deal and further impoverish the productive sector. All transfer of wealth will be to the 1%.

The problem for the 1% is they are only, 1%.
At some stage enough of the 99% will decide things are going to change.  That 1% is then at risk (in extremis) from a lampost and a rope ie a revolution....or less risky a debt jubilee happens.....ie I dont myself they can keep the lid on this issue (growing inequality) for ever, the pressures will be its end. 
The 1920s was a gilded age then the 1930s was a big reset, we are I think in a seocnd gilded age and face another 1930s reset only bigger.
I dont think its got many years left to run myself....maybe 5, maybe 10.....

Revolution will probably happen when the 99% can't afford the iphone 9 or Playstation 6

Agreed.....in the meantime families pour all they have into the banks coffers as fees and interest, our young and most able travel offshore to make a go of their lives.
Even the Republicans in the States understand cutting costs in the Government is counterproductive at this stage. I don't think our leaders are up to it frankly.

Watch this space...expect Wheeler to announce a delay in any effort toward Basel banking whatever...
"banks are calling for a review"

Actually, the reverse. The RBNZ has now finalised full implimentation  in New Zealand of Basel III, today.

Re #5
If you ever want to understand why Winston Peters gets such a hard time (Is so feared by) the Powers That Be (The Wizards of Oz), it dates from the Winebox Inquiry
When Winton Peters revealed the fraud, OF COURSE it was found to be legal!!!! by the Court. BUT those bustards have never forgotten or forgiven WP.
I have never forgotten either, and vote for him every election no matter how often the TVNZ (lackeys) Polical Pundits tell me "you are throwing your vote away". They are terified of him, and try to nip at his heals and ridicule him for their BIG Bosses. yap yap yap, yip yip yip. Little dogs!