Here's my Top 10 links from around the Internet at 10 am today in association with NZ Mint.
As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.
See all previous Top 10s here.
My must read today is #3 on the end of growth by Satyajit Das.
1. The basic problem - The latest round of figures showing what is happening in real economies -- as opposed to stock, bond and property markets -- show they're struggling to get going despite all the stimulus that has been pumped in.
Everyone is racking their brains to try to work out why the engine isn't firing. Why isn't the 'wealth effect' not translating into consumer demand?
Why aren't cashed up companies investing heavily in new production, jobs and wages? Why aren't consumers spending their perceived capital gains on actual stuff and services.
Can the structural issues of ageing populations, weak middle class incomes and high household debt be solved with yet more money printing?
Here's former US Labor Secretary Robert Reich with his take, which I agree with:
We’re now witnessing what happens when all of the economic gains go to the top, and the rest of the population doesn’t have enough purchasing power to keep the economy going.
Four years into a so-called recovery and we’re still below recession levels in every important respect except the stock market. A measly 88,000 jobs were created in March, and total employment remains some 3 million below its pre-recession level. Labor-force participation is its lowest since 1979.
Businesses won’t hire and expand unless they have more customers, but most Americans can’t spend more. Last Friday’s retail sales report showed sales down .4 percent in March. Consumer sentiment has fallen to its lowest level in nine months.
The underlying problem is the vast middle class is running out of money. They can’t borrow more — and shouldn’t, given what happened after the last borrowing binge.
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2. And the solution? - Here's Reich again with his ideas on how to get those middle classes spending again. A couple of the solutions look suspiciously like interest free student loans and Working For Families, which I'm not thrilled about.
Widening inequality is not inevitable. If we wanted to reverse it and restore middle-class prosperity, we could.
We could award tax cuts to companies that link the pay of their hourly workers to profits and productivity, and that keep the total pay of their top 5 executives within 20 times the pay of their median worker. And impose higher taxes on companies that don’t. We could raise the minimum wage to half the average wage.
We could increase public investment in education, including early-childhood. We could eliminate college loans and allow all students to repay the cost of their higher education with a 10 percent surcharge on the first 10 years of income from full-time employment. We could expand the Earned Income Tax Credit.
And we could pay for all this by adding additional tax brackets at the top and increasing the top marginal tax rate to what it was before 1981 – at least 70 percent.
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3. The end of growth? - Satyajit Das also muses here at Economonitor on the decoupling we're now seeing between asset prices and the real economy.
Driven by massive monetary stimulus from central banks, the performance of financial markets, especially stocks, have decoupled from that of a moribund real economy. Financiers assume that the strong rise in equity markets anticipates a strong economic recovery. However, there are fundamental reasons why the world may be entering a period of low or no growth. If that turns out to be the case, then the optimism of financial markets may prove premature.
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4. And here's how to fix it - Das goes on to suggest some solutions.
A return to economic growth requires a return to real engineering rather than reliance on financial engineering. It must reverse the trend to a state where the real economy simply supports trading and investment in claims on underlying resources.
Traditional growth relies on increasing population, sustainable and affordable resources, new markets as well as improved productivity and innovation.
While global population is increasing, much of the growth is in poorer nations. The population in more affluent developed nations is shrinking, with birth rates falling below replacement levels. In many nations, the working age population is declining as the generation born immediately after World War 2 reaches retirement age. However, with increased life expectancy, the size of this aged group creates demand for health and retirement income which must be supported by a dwindling number of workers. In developed countries, the aging population will constrain growth.
5. The end of a European era - The word on the street in Europe is that the powers-that-be who have spent the last three years preaching austerity are now realising the political will to support it has gone. Here's EU Commission President Barroso admitting the inevitable. The growth figures overnight suggest the jury is back in. The austerity expansionism didn't work.
With budget cuts blamed for a second straight year of recession, the EU's top economics official Olli Rehn indicated over the weekend that more flexibility on tough economic targets was needed. His boss, European Commission President Jose Manuel Barroso, said on Monday that austerity had reached its natural limits of popular support.
"While I think this policy is fundamentally right, I think it has reached its limits," he told a conference. "A policy to be successful not only has to be properly designed, it has to have the minimum of political and social support."
6. The death of expansionary austerity - L Randall Wray talks here about the death of the idea that goverments could be austere and drive growth at the same time. It might have worked if households and companies were leveraging up at the same time. When they do it at the same time you get a recession or worse. That's what is happening in Europe.
Q: Why did so many economists and politicians believe in the first place in expansionary austerity which is causing human suffering without an end in Europe today?
A: They wanted to believe it. It fit with their neoliberal ideology. Of course, this happens all the time. They should now be embarrassed. There is no such thing as expansion through fiscal austerity. It has never worked; there is no evidence to support the theory. I do believe that in some cases countries can still grow IN SPITE OF fiscal austerity. But they do not grow BECAUSE OF fiscal austerity. And, finally, R&R have not shown that high debt ratios by sovereign governments that issue debt in their own currency lead to fiscal crises. There isn’t evidence in support of this neoliberal belief, and everyone should be skeptical of the claims of deficit hysterians.
7. And here's how to fix it - Wray has a few ideas involving the government spending a lot of money on job creation.
Q: What is the single most effective tool to support aggregate demand and tackle the mass unemployment in a depressed economy?A: As Yeva and I argued in another piece (http://www.levyinstitute.org/pubs/ppb_111.pdf), in a depressed economy, you need fiscal expansion. By that I do not necessarily mean “priming the pump”—generalized spending. I think it is much better to aim the spending where it is most needed, and that usually means more jobs. Hence, I favor spending directly on job creation.
Here’s the problem. You do need fiscal policy space to engage in stimulus. Countries with their own floating currency have that space, so they can always choose to spend more to stimulate demand. Countries that peg to gold or other currencies may not have the space. And unfortunately, European countries that dropped their own currencies in order to adopt the foreign Euro currency do not individually have the policy space. So for the EMU, the fiscal expansion can only come from the center. And that is the big problem that has not been resolved. To make matters worse, the Troika still believes in expansionary austerity—a non sequitur. And so they will continue to impose austerity and suffering on the population.
The United States is an unequal society. According to the Congressional Budget Office, the top 20 percent get about half the nation’s income, compared to the 5 percent of all income shared among the bottom fifth of households. The top 10 percent of the population controls about 70 percent of the wealth. Among rich countries, America’s inequality is certainly extreme. But the world as a whole is an incredibly unequal place. Norway—held up as a model of equality—still sees the bottom fifth of households with incomes less than a third (PDF) those of the top fifth.
Why is there such inequality? The choices we make as individuals can put us considerably above or below our peer average in terms of income or happiness or status. But our peer average itself is set by forces beyond our control—factors such as to whom we were born. And our peer average explains our relative standing against national averages far more than our own choices.
Take the importance of family. In the U.S., about 50 percent of variation of wealth and about 35 percent to 43 percent of variation in income of children can be explained by the relative wealth and income (PDF) of their parents, suggest economists Samuel Bowles and Herbert Gintis. One reason for this tight relationship is that parents who were educated are far more likely to educate their own kids.
9. Paying people to invest - Bloomberg reports on how investment banks pay up front to encourage investors in Asia to buy US$ bonds. Sigh. 1% returns. No wonder foreigners are flooding cash into New Zealand with its outrageously high returns of over 4% pseudo-guaranteed in term deposit accounts here.
Borrowers in Asia have stepped up the use of rebates to get wealthy individual investors to buy their dollar-denominated bonds, underscoring weakness in the market as returns dwindle to an 18-month low.
At least 24 percent of the deals in the region last quarter provided a monetary incentive for private banks whose clients bought the offerings, more than double the same period of 2011, according to FIL Ltd., a global fund manager known as Fidelity Worldwide Investment that oversees $248.2 billion. While the practice is legal, it’s only common in Asia, lawyers say.
The sweeteners helped push dollar offerings in the region to a record $44.9 billion last quarter, according to data compiled by Bloomberg, even as returns slowed to about 1 percent, the least since the three months ended September 2011 as measured by Bank of America Merrill Lynch indexes. Citigroup Inc. and Barclays Plc predict demand will continue to wane.
10. Totally Jon Stewart on CNN's Boston bombing performance.
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