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. Giving bipartisanship a bad name
About the worst in American congressional politics gets revealed in their 'Farm Bill'. It's the gold standard in bad public policy. It's pork barrel politics, literally.
Until they find a way to break up enabling legislation like this, they will always be tarnished.
Plenty of very smart people have tried and over the past 50 years all have failed - which seems odd given nearly everyone is in agreement it is a terrible way to run a government. Ironically, there is bipartisan support that things need to change, and the latest bill got enacted with a bipartisan vote. But between those two objectives the 'doing' just got worse.
The Economist has a useful review.
While Congress was gridlocked it was easy to forget how ugly the smooth functioning of government can be. After a delay of two years, a reminder came on February 4th when the Senate passed the farm bill, a strange piece of legislation which costs nearly a trillion dollars. It mixes benefits that mostly go to the poor (food stamps) with agricultural subsidies that mostly go to the rich (crop subsidies for large farms). Given a blank slate, nobody with an interest in either alleviating poverty or improving farming would construct such a law. Yet here it is again.
The alignment of rural and urban interests, which dates from when the two bits of legislation were yoked together in the 1970s, had temporarily broken down, largely thanks to some House Republicans who wished to treat food stamps (which account for 80% of farm-bill spending) and agricultural subsidies separately. They were motivated by fiscal prudence and the belief that welfare discourages work.
2. Does China have 'special defenses'?
China's credit addiction and the guesses as to how it 'will end' is popular sport these days. It will end I am sure, but I am not sure whether it will be with a bang (as the apocalypse crowd seem to want) or whimper as it has in many other countries over the past century. A bang would hurt us, but a whimper would hurt them in the long run - although there is doubt about the real level of hurt places like Japan or Taiwan have actually suffered when they had theirs.
Still, as a spectator sport, we love a good credit crisis story.
Ruchir Sharma from Morgan Stanley has provided one in the FT:
Forget Argentina. The big story of 2014 in the emerging world is the black cloud of debt hanging over China.
Debate rages over how this tale will end. Most analysts believe that the Chinese economy will once again expand by more than 7 per cent this year, despite ballooning private sector debts. But the pessimistic minority has history on its side. Only five developing countries have had a credit boom nearly as big as China’s. All of them went on to suffer a credit crisis and a major economic slowdown.
3. 'It's getting too crowded'
Conservative mono-culturalists have a new slogan to hide behind - "it's getting too crowded". The issue is playing out in Switzerland because you can force a binding referendum on just about anything there. They are voting today. It is close and early reports show that the proposal will win. The BBC has a review of the issues:
He would like Switzerland to return to its earlier policy of hiring foreign workers on a temporary or seasonal basis, requiring them to come to Switzerland alone and to return home as soon the specific job they came to do is finished.
"With free movement now, we know that only 50% of the immigrants work here," he explains. "The rest are just families."
But Mr Haab's view is not shared by many Swiss employers, who claim their success is actually because of, rather than despite, free movement.
4. A Spaniard German in the works
Readers of interest.co.nz (who have a very good memory) will recall we reported last year on a German Constitutional Court review of the ability of Germany to participate in the ECB's 'whatever it takes' policy to prevent a euro meltdown. The ECB declared it would do its own QE if necessary. The German Bundesbank said that Mario Draghi didn't have the right to do so and tested the assertion in the courts (the German courts).
Well, on Saturday after EU markets closed, the court issued its decision - it agreed with the Bundesbank.
The eurozone doesn't have a banking union, a fiscal union or a political union, but at the very least it can claim to have a fully functioning monetary union. If the largest national central bank refuses to participate in an ECB program, that claim could be called into question, to the great dismay of investors. Here is Megan Greene of Bloomberg:
The German court has surprised many analysts by offering a “no, but” ruling: It thinks the bond-buying program violates German law, but recognizes that the European Court of Justice should determine whether the ECB is acting within its mandate. The European court must now investigate whether the program falls within the ECB’s mandate as a form of monetary rather than economic policy. This will take at least 18 months.
So what happens in the meantime if a country gets in trouble and the ECB wants to buy its bonds? One possibility is that the program will be put on hold until the European court deems it legal -- meaning that the central bank's most powerful policy tool will be completely defunct. This should worry Portugal, which is due to exit its bailout program later this year and is taking some comfort that there is a safety net if things go horribly wrong. Other financially challenged countries in Europe should be concerned as well: Both Greece and Italy have unstable governments that could collapse over the next 18 months, possibly triggering investor panic.
5. The case against performance reviews
Performance reviews are in the spotlight. It is doubtful that they work as intended. The problem with many great workers is they know how good they are. But the problem with many bad workers is they don't know how bad they are. Derek Thompson at The Atlantic has taken a look at the process and found many flaws.
It's bad enough that annual evaluations are outdated. It's problematic that they're susceptible to a plague of biases. It's worse that they tend to be pathetic motivators. But the coup de grace is that they're not even good at identifying the thing they're meant to identify: performance.
Research from Corporate Executive Board found that two-thirds of employees receiving the highest scores in a typical performance management system "are not actually the organization’s highest performers," Jena McGregor reported for the Washington Post.
6. The time has come
I was taken by Rob Stock's Sunday Star-Times story about Vector's solar offer. It is not so much that it is a great deal - it may or may not be, I don't know - but it is the first I know of that makes it really easy to get photovoltaic cells generating usable and storable electricity on your house. For about $3,000 you can get a 5kW system installed and running, less if you need less.
I reckon Vector will be swamped, and these sorts of systems will now quickly go mainstream.
... with the installation cost of the Vector scheme being lower than the solar water heating systems, the company paying for maintenance, and the smart monitoring technology (Vector also monitors performance remotely), some of the big disincentives for solar are effectively removed.
Just how big can the scheme get?
Mackenzie expects the current 250 installations over the past ten months to grow substantially with much of that coming from the 30,000 or so new homes due to be built in Auckland each year.
It's another reason the Government needs to get right out of owning electricity companies. Big disruption is on the way.
7. More women in the workforce raises the jobless rate
My reading at the moment is of The Second Machine Age by two MIT professors Erik Brynjolfsson and Andrew McAfee. I am only about halfway through but am almost ready to declare it a 'must read'. (It's less than NZ$20 on a Kindle.) It's subtitle is 'Work, Progress, and Prosperity in a Time of Brilliant Technologies' and it raises some troubling questions about what we are all going to do to earn a living while explaining why we have a sudden burst of inequality. It is getting much praise and I can see why.
One thing it does explain is why labour force participation rates are under pressure. Unemployment rates may not be rising, but that is because participation rates are falling as people in the labour force can't or won't change fast enough in the face of changing demand for skills.
But here's a challenge for the authors: European unemployment remain very high (12%) because participation rates have remained high. In fact Europe's female participation rate has actually risen strongly since the onset of the 2009 recession. Older women are entering the workforce there fairly fast. Eduardo Porter has the details in a NY Times blog.
But is it a short term trend to help the income of families under pressure? It won't last if Brynjolfsson and McAfee are right.
8. Priceless but worthless?
When S&P's cut Italy's credit rating two notches in 2012 to BBB+ the then prime minister Mario Monti called the downgrade as "a further problem as it makes certain investments impossible". The Italians weren't happy. Now they are looking at suing the credit ratings agency for failing to value its historical and cultural treasures. More from the British Guardian:
The latest Italian case may be the first time the powerful ratings agencies have been accused of culturally illiteracy, but they already faced charges of poor maths and dismal economic forecasting.
When the US saw its credit worthiness downgraded in 2012, the then Treasury secretary Tim Geithner accused the agencies of "a stunning lack of knowledge about basic US fiscal maths". The US government is pursuing a £5m lawsuit against S&P, accusing the agency of defrauding investors by pumping up the ratings of mortgage securities to win more business from large investment banks.
The ratings agencies also stand accused of failing to see the financial storm coming. In 2009 Moody's issued a report titled Investor Fears over Greek Government Liquidity Misplaced – just six months before Athens was forced to seek a bailout.
I think the Guardian in its zeal to report this case and focus on other credit agency failings are forgetting that to be included as an asset backing borrowings, the 'historical and cultural treasures' would need to be claimable in the event of a default - and then sold on. Firstly I very much doubt any lender could expect to take possession, and secondly in the unlikely event they did the selling process would swamp even the large international art market. I think Italy's 'treasures' are both priceless and worthless as far as borrowing against to pay pensions or garbage collections.
9. The BRICs wall
It is no longer news that emerging markets are suddenly doing it tough. They enjoyed an investment boom fueled by very cheap money that flowed from the US, Japan, China and to some extent Europe as the first world tried to stimulate growth. The flood of liquidity gave them an impressive growth spurt, but with the end of stimulus, the effect seems to be reversing.
It has lasted long enough though to not only build a middle class in many of these countries, but raise aspirations and along with it and new and powerful political voices and clout.
Without growth there is growing anger. Spiegel Online assesses the mood:
It isn't just the raw figures that are fueling concern among the governments of developing nations. From Beijing to New Delhi to Rio, the upswing has fostered a new self-awareness in people, creating a broad popular movement in the truest sense of the term. In recent years, impressive middle classes have taken shape in virtually all of the emerging economies.
Members of that middle class are now demanding a larger piece of the pie and higher wages. At the same time, they also want "good governance" -- meaning greater responsibility and accountability for their leaders -- and the right to increased democratic participation. Economic progress has served as catalyst for political demands. If that dream now suddenly ends, it could also slam the brakes on these emerging popular movements -- or at least stir emotions in dangerous ways.
10. Today's quote
"Most economic fallacies derive from the tendency to assume that there is a fixed pie, the one party can gain only at the expense of another." - Milton Friedman
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