Has the USA exceeded the optimum level of inequality

Richard B. Freeman in Optimal inequality for economic growth, stability, and shared prosperity: the economics behind the Wall Street Occupiers Protest? looks at the level of inequality in the USA and argues that too much inequality reduces peak economic output.

How companies like Apple reduce their tax bill

In How Apple Sidesteps Billion in Taxes Charles Duhigg and David Kocieniewski document some of the methods companies like Apple use to minimise the amount they have to pay in tax. If you want to know what a Double Irish With a Dutch Sandwich is then read the article.

The luck of winning elections at the right or wrong time

Peter Brent in his Mumble blog has a great post called Deserve’s got nothing to do with it. In it he has graphs showing the budget balances from 2000–1 to 2009–10 for three countries: Australia, Canada and New Zealand. Basically all three had budgets were in surplus until the GFC hit and then all three went into deficit, and are sill in deficit.

He then looks at when their current Government was elected and how it's doing in the polls. It seems that in terms of timing, the current Australian Government was very unlucky. To quote from the blog:

No matter which country you pick in these graphs, the fiscal year in which you would least want to take government is 2007–8, the last pre-GFC one. Then the first budget you put together yourself is the 2008–9 one.

In each of those countries the government’s well-laid plans for 2008–9 were blown to smithereens and the bar dropped deeply into the red.

You can argue ‘til the cows come home about waste and too much spending and how many jobs were saved and at how much per job.

But no Australian government would have avoided going into deficit to the tune of tens of billions of dollars from 2008–9.

In political terms, $20 billion wouldn’t be much different to $50 billion. Either would have provided the ammunition Tony Abbott and team have been so adept at using. (Barnaby Joyce is especially talented with the metaphor.)

Throw in this politically-challenged government and it just gets better.

A perfect storm.

International Atomic Energy warning on catastrophic climate change

Fiona Harvey and Damian Carrington in Governments failing to avert catastrophic climate change, IEA urges have reported that the executive directory of the International Energy Agency is warning that migration to alternative energy sources is happening too slowly:

Governments are falling badly behind on low-carbon energy, putting carbon reduction targets out of reach and pushing the world to the brink of catastrophic climate change, the world's leading independent energy authority will warn on Wednesday.

The article goes on:

"The world's energy system is being pushed to breaking point," Maria van der Hoeven, executive director of the International Energy Agency, writes in today's Guardian. "Our addiction to fossil fuels grows stronger each year. Many clean energy technologies are available but they are not being deployed quickly enough to avert potentially disastrous consequences."

On current form, she warns, the world is on track for warming of 6C by the end of the century – a level that would create catastrophe, wiping out agriculture in many areas and rendering swathes of the globe uninhabitable, as well as raising sea levels and causing mass migration, according to scientists.

Split second decision making in sport

The article In the blink of an eye looks at the decision required in the high speed sports like cricket, baseball and tennis.

So what sets such batsmen apart? It is tempting to assume that they simply have better visual reaction times than the rest of us and can pick the ball up quicker. But according to “Wait”, a new book by Frank Partnoy, that is not the case. The book is about general decision-making in life, but contains a chapter on “super-fast sports”. It concludes that the best batsmen are no faster at “seeing” than their less successful colleagues, or even many amateurs. Whether you are Virender Sehwag or a village-green clubber, it will take you around 200 milliseconds to react to the ball. The best batsmen are set apart by what happens in the next 200 milliseconds, which the book calls the preparation stage. This means deciding on the shot, moving into the correct position and swinging the bat. (The third stage, hitting the ball, accounts for the last 100 milliseconds.) And here the margin between us and them is miniscule: “A cricket batsman who is just fifty milliseconds slower than an average professional—in other words, someone who is slower by just a fraction of the time it takes to blink—simply has no chance of competing with the pros.” Quoting Peter McLeod, an Oxford professor, the book goes on: “Their skill, it seems, lies in how they use the information to control motor actions once they have picked it up, not in the more elementary process of picking it up.”

Krugman on the cause of Europe's woes

Paul Krugman in Rogoff's Bad Parable writes that, apart from Greece, the cause of southern Europe's financial problems were huge private capital inflows rather than Government debt. Indeed, Government debt to GDP had been falling prior to the crisis.

What brought on the crisis were huge private capital inflows. Don’t think runaway politicians; think German Landesbanken lending money to Spanish cajas, fueling a real estate bubble.

So what was the big problem with the euro? Not so much that it promoted these flows; it probably did, but the GIPSIs aren’t the first economies bond markets have temporarily loved not wisely but too well. No, the key problem is lack of a way to adjust when the music stopped.

The mythology around Anzac

Paul Daly wrote a very interesting essay Anzac: Endurance, Truth, Courage and Mythology. It looks at the mythology around Anzac day and those Australians that served in war. Well worth reading.

High tax rates might not slow growth

In Diamond and Saez: High Tax Rates Won't Slow Growth Peter Diamond and Emmanuel Saez argue that countries that have reduced their top marginal tax rates have not seen any greater economic growth than those that have kept their top rates relatively high:

For example, from 1970 to 2010, real GDP annual growth per capita averaged 1.8% and 2.03% in the U.S. and the U.K., both of which dramatically lowered their top tax rates during that period, while it averaged 1.72% and 1.89% in France and Germany, which kept high top tax rates during the period. While in no way does this prove that higher top tax rates actually encourage growth, there is not good evidence from the aggregate data supporting the view that higher rates slow growth.  

However, what matters more is what is done with the extra revenue:

One cannot evaluate the ultimate growth effects of raising more revenue without identifying what is done with the revenue. If part of the revenue is used to reduce the federal debt, more of savings go into capital investment, enhancing growth. The fact that those paying higher taxes will reduce their savings somewhat does not fully offset this effect as some of their higher taxes would come out of consumption.

If some of the additional revenue is used for public investments with a high return, such as education, infrastructure and research, it raises growth further. The neglect of public investment over the last few decades suggests that the returns could be quite high.

Large losses in efficiency come when people are limited in their ability to finance good investment opportunities. Surveys show difficulty of borrowing as an issue for start-ups. And higher education is influenced by the finances of parents, and the earnings premium for higher education is very high. Access to investment financing is a much bigger issue for low earners than for high earners. By the time Bill Gates got rich, Microsoft was not likely to have trouble financing investments. Hence, increasing tax rates on the already rich might not hurt growth as much as increasing tax rates on the soon-to-be rich.

Dynamic Capitalism vs the Welfare Sate

There's an interesting article in The Fiscal Times, The Choice: Dynamic Capitalism vs. the Welfare State, comparing the economic performance of the US vs Europe during and after the GFC.

There is an implied tradeoff here. In the U.S. system, workers have less protection and hence more insecurity than in countries where protection is more prevalent. In return for giving up security, there are two promised benefits. First, it is argued, economic growth will be higher. With less government interference, lower taxes, and unions all but absent, the economy will be free to reach its growth potential.

Second, the economy will be more stable. If a big shock hits the economy, the U.S. will be able to reestablish full employment in new, productive, high-paying jobs much faster than countries with greater social protections and the flexibility inhibiting institutions that come with them.
If these two benefits are large, then trading security for dynamism, flexibility, and higher growth will be more than worth it. So has the economy lived up to these promises?

The article also notes that most of the growth in income in the USA over the decade preceding the GFC was in at the top.

In terms of economic performance (or at least unemployment) tt seems that the USA was middle of the road - it did better than the southern European countries but worse than the northern European countries.

With such a mixed outcome, it’s difficult to support the claim that the free market approach that began in the 1970s has lived up to the promise of a more dynamic, flexible, faster growing economy. And the case is even harder to make when the fact that the deregulation of the economy that helped to produce the housing bubble is factored in.

Interestingly those European economies with the highest levels of social welfare have had the least problems with sovereign debt whilst those with lower levels of social welfare (think Greece and Italy) have fared the worst.

A larger welfare state did not lead to a sovereign debt crisis, but it did lead to substantial protection during the recession and much better performance than in the U.S.

The author of the article suggests that the USA has room to improve in this area.

Australian quarter 1 2012 CPI graphs

There's a range of graphs at the Mark Graph blog showing the March quarter 2012 CPI data.

Superannuation and tax concessions

In The Global Mail Mike Seccombe has written an article about the tax concessions for superannuation to high incomers in Super Duped. He looks at the large amount of non compulsory contributions being made by high income earners taking advantage of the lower tax on salary sacrificed super.

The invisible hand doesn't exist

Jonathan Schlefer writes in There Is No Invisible Hand that academic economists have long known that Adam Smith's invisible hand doesn't exist:

One of the best-kept secrets in economics is that there is no case for the invisible hand. After more than a century trying to prove the opposite, economic theorists investigating the matter finally concluded in the 1970s that there is no reason to believe markets are led, as if by an invisible hand, to an optimal equilibrium — or any equilibrium at all. But the message never got through to their supposedly practical colleagues who so eagerly push advice about almost anything. Most never even heard what the theorists said, or else resolutely ignored it.

Increasing creativity

Jonah Lehrer has written an interesting article in the New Yorker titled Groupthink. He first debunks the myth that brainstorming aids creativity. Instead he argues that people are more creative when they are brought together as a group and allowed to argue and debate. He cites a study by Brian Uzzi "a sociologist at Northwestern, has spent his career trying to find what the ideal composition of a team would look like". He then goes on to look at the success of Building 20 at MIT:

The fatal misconception behind brainstorming is that there is a particular script we should all follow in group interactions. The lesson of Building 20 is that when the composition of the group is right—enough people with different perspectives running into one another in unpredictable ways—the group dynamic will take care of itself. All these errant discussions add up. In fact, they may even be the most essential part of the creative process. Although such conversations will occasionally be unpleasant—not everyone is always in the mood for small talk or criticism—that doesn’t mean that they can be avoided. The most creative spaces are those which hurl us together. It is the human friction that makes the sparks.

Edit 13/6/2012:  Isaac Chotiner writes a less than complementary review of Lehrer's book Imagine.

Mark Latham on climate change denial

Over at the Financial Review Mark Latham has written a very interesting, and I suspect accurate, oped Climate change denial not just for fools. Recommended reading.

Michael Pascoe on the Greek tragedy

Last year Michael Pascoe wrote an interesting article on the economic crisis in Greece The Greek tragedy - shoot the chorus. Ever so often I go looking for it so I can send it to other people. As I can't find where I've referenced it before I'm going to do so here so hopefully I can easily find it in the future.

Interesting article on middle class welfare

At The Conversation Gerry Redmond and Peter Whiteford have written an interesting article For richer or poorer: the delicate art of messing with middle class welfare. It notes how well targeted Australia's family assistance programs are, especially compared to other countries. They note that:

The main reason why family payments go to middle income and some higher income families is that we have generous base rates of payment for lower income families and we try to not withdraw them at too high a rate in order to avoid disincentives to work. Correspondingly, if governments wanted to substantially cut “middle class welfare” they would need to either cut benefits for lower income families or increase effective tax rates on middle income families through a tighter income test (or both).

Matt Cowgill has posted an interesting graph on Twitter that shows how "'middle class welfare' in Australia has changed - not as much as you'd think".

The welfare state did not cause the Euro crisis

On the We are all dead blog Matt Cowgill has written that The welfare state is not to blame for the Euro crisis. It's an interesting post that shows that the idea that the "Euro crisis is a crisis of the welfare state, caused by high taxes and/or welfare spending as a proportion of GDP" is just plain wrong. In a series of graphs Matt shows that the assertion that "European countries tax & spend too much, and that the bond markets have finally stopped the party" is false.

Matt notes that:

The European sovereign debt crisis is about a currency area that encompasses too many diverse regions, with too little fiscal integration and weak oversight. It’s about a central bank that is reluctant (or unable, depending on your point of view) to play the role of lender of last resort. In the case of Greece, yes, it’s about a government that spent too much, taxed too little, and fiddled its books to hide its deficit. But look at Ireland: it’s a low-tax, low-spending country that was held up as a paragon of fiscal virtue by conservatives before 2007. George Osborne declared Ireland to be “a shining example of the art of the possible in long-term economic policymaking.”

The crisis is not about the welfare state. I can’t understand Carr’s motivation in suggesting otherwise.

This is a blog post well worth reading, but then so it the rest of Mark's blog.

Public social spending in the US and Australia

Matt Cowgill has posted some interesting graphs on Twitter relating to public social spending. These graphs are in response to Joe Hockey's call for cuts to welfare. As Matt Cowgill notes:

If you want to make big cuts to public social spending, they have to come from health or old age pensions.

The first graph shows Australian Government public social spending as a percentage of GDP. As you can see, health and old age pensions comprise the bulk of social spending.

(source https://twitter.com/#!/MattCowgill/status/192756388261412865/photo/1)

The second graph compares Australia's public social spending to that of other countries. Surprisingly, the United States is higher than Australia.

(Source https://twitter.com/MattCowgill/status/192756090742648834/photo/1)

The third graph compares Australia and the US on social spending. I think it's worth noting that the US spends a lot more on health than Australia even though we have universal cover in Australia, unlike the US.

(Source https://twitter.com/MattCowgill/status/192772438268977153/photo/1)

Update: Matt Cowgill has written an article Has Joe Hockey promised the end of the Australian safety net? including the above graphs.

Why we lost the war in Afghanistan

Sally Neighbour has written a very interesting article in The Monthly - How We Lost the War: Afghanistan a Decade on from September 11. Worth a read.

Tax receipts as a percentage of GDP

Bernard Keane tweeted this graph showing tax receipts as a per cent of GDP. It shows why the budget is in deficit.

This graph was copied from http://yfrog.com/kgp1rdtj