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What We Read Today 12 May 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

  • Putin Demands $3.8B From Visa And MasterCard (Keith Griffith, Business Insider) In response to western sanctions, Russia has demanded huge "security deposits" for Mastercard and Visa. These are part of a new national payments network law enacted last week.

  • The EU's ties to Russia rule out any serious sanctions (Walter Kurtz, Sober Look) Europe has massive energy dependencies on Russia, $246 billions of exports to Russia and major banking relationships which could cause the European banking system to collapse it they were abruptly severed. Kurtz says sanctions are a non-starter.

Unfortunately this report has many deficiencies.

Two of the most significant deficiencies are:

A. The authors are (purposely?) unclear as to whether they are talking about the impact of anthropogenic climate change or what the IPCC calls internal variability: that is natural cycles most of which are controlled by oceans.

B. The draft of the agriculture chapter of this report is dated January 2013 meaning it was written in 2012 and thus it is not based on the IPCC (Intergovernmental Panel on Climate Change) Fifth Assessment...i.e. the U.S. Government Report was out of date on the day the IPCC assessment was issued. The U.S. government report was based on out-of-date IPCC documents.

Today there are 10 articles discussed 'behind the wall'.

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  • Unemployment Is a Demographic-Based Structural Issue (Michael Shedlock, Financial Sense) For 1997 to 2014 labor force participation for 25-54 year-olds has fallen for all three periods of recovery/expansion as well as for both recessions. The last period where it increased was the 1992 thru 1996 period of that recovery/expansion. Considering that 2 1/2 complete business cycles have seen participation move in the same direct (down) how can Bernanke (cited by Shedlock) and Krugman (here) maintain that the problem is cyclical. Perhaps they don't mean cyclical, as in business cycle?


  • Rollover Rule Change Will Cause Trouble (Natalie Choate, Morningstar Advisor) We have discussed this new IRA problem before but this is the best write-up on it we have seen. So read this one as well. Basically, the message is that there are so many ways to run afoul of IRS rules on rollovers which pass through the investor's hands that all rollovers should be done with a custodian to custodian transfer.
  • Democracy, Not Capitalism, Is Failing the Middle Class (Peter Morici, Money News) Morici says that taxation is not the solution but good governance is. Good corporate governance (instead of rubber-stamp boards) and prudent regulation of monopoly positions are two things that are needed, according to Morici.
  • Warning Sign: Number Of 1% Down Days Are Ticking Up And Tracking Taper (GaveKal Capital, Advisor Perspectives) It is tempting to attribute the addition of assets to the Fed balance sheet and the associated increase in "checking account" (bank deposits) assets in the economy rather than in "savings accounts" (bonds) with increases in the value of stocks. Econintersect cautions that there are enough periods of high negative correlation that the overall correlation may be fair or poor. Best be careful if trying to use this for market timing.


  • Geithnerís Single Most Revealing Sentence (William K. Black, New Economic Perspectives) Bill Black is a GEI contributor. In this piece Black portrays Geithner as a tool of the financial sector instead of the regulator that Black feels he should have been. While this is a kind of review of Geithner's new book Stress Test, it is more of a discussion of selected portions of the book. As he always does, Bill Black comes down strongly on the side of public interest and shows no tolerance for pandering to power.
Value creation and problem-solving arise from many sources, not just the technological innovations that receive media coverage. If we combine the many sources of value creation unleashed by digital technologies, we realize that ours is one of the great transformative eras in human history.
  • Battling the darkness (Jing Jiang, The Economist) Every time regulators curb one form of non-bank lending, another begins to grow. China is playing a version of whack-a-mole.


  1. Wrongly conflates physical capital equipment with all forms of money valued assets whether they are in productive use or not;
  2. Does not explain the economic pattern differences of various countries;
  3. Does not explore what his data clearly shows: that profit based incomes are far more important to building inequality than are changes in wage structures.

Galbraith says that the "fundamental law" proposed by Piketty (r>g) is neither fundamental nor a law but an artifact of the conflation of productive and non-productive wealth; And furthermore that market value (driven by bubbles) rather than physical volumes of capital is a dominant factor in his relationship, marginalizing the entire argument for a "fundamental law".

According to Galbraith, Piketty is essentially a born-again New Deal Democrat in philosophy. Galbraith says that it would make no sense to go back that system now. He (Galbraith) sees instead a different path involving less expansion of the social welfare state and more implementation of such reforms as higher minimum wages, continued low tax on earned income but higher tax on unearned income (he calls it rentier income). If need be, he says the state can impose regulation to force less oligarchy and more free market competition.

Galbraith agrees with Piketty's position on raising estate taxes. But Galbraith says Piketty has the wrong reasoning; estate taxes are not for redistribution or raising tax revenue but to prevent the formation of dynasties.

Galbraith's conclusion:

In sum, Capital in the Twenty-First Century is a weighty book, replete with good information on the flows of income, transfers of wealth, and the distribution of financial resources in some of the world's wealthiest countries. Piketty rightly argues, from the beginning, that good economics must begin-or at least include-a meticulous examination of the facts. Yet he does not provide a very sound guide to policy. And despite its great ambitions, his book is not the accomplished work of high theory that its title, length, and reception (so far) suggest.

Read also reviews of Capital in the Twenty-First Century by Philip Pilkington and by Hunter Lewis.

  • CNBC survey shows millionaires want higher taxes to fix inequality (Robert Frank, CNBC) The wealthy have opinions about inequality and what to do about it that are not dramatically different from everyone else. A much bigger difference arises between Democrats and Republicans. For example, nearly 2/3 say that higher taxes on the wealthy are part of the solution. But that result is split 78% of Democrats and 31% of Republicans.



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