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 (and sometimes longer ones) 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.
Cannabis cuisine rises in wake of legalizations (Michellle Locke, Associated Press, MSN News) Legalizations are creating a burgeoning new cook book genre. There are books about cooking with herbs - and now there are books about cooking with herb.
There are 13 articles discussed today 'behind the wall'.
Five articles discuss China's debt and growth issues;
Three articles discuss in significant detail the question of managing corporations for extraction rather than for reinvesting for future growth.
This week we have started a new section "Other Economics and Business Items of Note".
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China’s bad bank clean-up crew (Jamil Anderlini and Gabriel Wildau, Financial Times) The growth of private debt in China has been one of the most astounding in history. The amount of bad debt hidden within this tidal wave has yet to be sorted out. For comparison, the increase in private debt over ten years has been almost 10-fold (2-fold as percentage of GDP). This compares with a 16 year rise of 50% for debt as a percentage of GDP for the U.S. And China has approximately 50% higher private debt to GDP ratio than the U.S. has and almost 1/3 higher than the U.S. at the peak of that credit bubble. Compare the graph below with the one in the next article.
Why the US can't escape Minsky (Steve Keen, Business Spectator) The U.S. is currently in the "virtuous phase" of the credit cycle where debt is just starting to grow again. If the growth of debt could be continued on a gentle upward path the good times could be extended. But, says Keen, starting from a higher level of debt the next cycle cannot be as strong as the previous one. Eventually there will be debt deflation which will go to a lower level of debt and stronger growth can then be reestablished. But the process of getting to that point will be far from pleasant.
China’s Productivity Problem Drags on Growth (Mark Magnier, The Wall Street Journal) This article reviews two research efforts which indicate that China's rapid growth has been quite inefficient, with overinvestment providing data misinterpreted as productivity gains. The decline in productivity gains recently really is a declining return on investment. As a result productivity data reports has been "widely contradictory".
Retreat in China's PMIs heightens calls for policy easing (Koh Gui Qing, Reuters) Growth in China's vast factory sector cooled in August as foreign and domestic demand slowed, two surveys showed on Monday, spurring new calls for more policy easing to prevent the economy from stumbling once more. Econintersect: Does anyone ever think about letting the air out slowly so the balloon can be reshaped (rebalanced)? For details of China's latest PMI (Purchasing Managers' Index) numbers, see GEI News.
Where Danger Lurks (Oliver Blanchard, IMF Finance & Development) Blanchard does not recommend understanding global macroeconomics better. Rather he suggests we should learn to avoid "dark corners". To Blanchard's credit he recognizes that mainstream economics didn't (and still doesn't) have a clue what cause the Great Financial Crisis. But his suggestion is that we should learn to avoid that unknown area so that we can continue to use the same models that have worked in previous non-dark corner times. This is hardly an inspiring suggestion. L. Randall Wray calls it "clueless". See Where Danger Lurks: The Dark Recesses of the Orthodox Mind (L. Randall Wray, New Economic Perspectives)
Republicans More Focused on Immigration as Top Problem (Frank Newport, Gallup Politics) Dysfunctional government, the economy and unemployment are close behind immigration as top issues. And, when it comes to dysfunctional government, there is almost complete agreement on cause: It is the other party's fault.
The corporate resource allocation process is America's source of economic security or insecurity, as the case may be. If Americans want an economy in which corporate profits result in shared prosperity, the buyback and executive compensation binges will have to end. As with any addiction, there will be withdrawal pains. But the best executives may actually get satisfaction out of being paid a reasonable salary for allocating resources in ways that sustain the enterprise, provide higher standards of living to the workers who make it succeed, and generate tax revenues for the governments that provide it with crucial inputs.
Since the early 1980s, when restrictions on open-market buybacks were greatly eased, distributions to shareholders have absorbed a huge portion of net income, leaving much less for reinvestment in companies. (Note: Data are for the 251 companies that were in the S&P 500 Index in January 2013 and were publicly listed from 1981 through 2012. If the companies that went public after 1981, such as Microsoft, Cisco, Amgen, Oracle, and Dell, were included, repurchases as a percentage of net income would be even higher.)
No one is denying that stock prices haven't gone up as a result of this trend. The claim, however, is that much more value has been extracted as a result of this than has been created for the real economy and other stakeholders - like taxpayers, employees and society at large.
You may not agree with all of Lazonick's points or his prescriptions for a better way forward, but I guarantee this piece will change the way you think about how markets are currently working and whom they're actually working for.
Econintersect: Do you remember when successful companies were the ones that invested for growth? If you are under 50 probably not because that was before you were old enough to graduate high school. But with the changes in tax brackets, especially for capital gains over periods as short as one year plus a day and for dividends, as well as for very high personal income top marginal brackets, a change occurred over the years in how finance made money with stocks: Extraction became tax advantaged over investment. For an illustration of this see the next article.
The long term slowing of the US economy - and its implications (John Ross, Key Trends in Globalization) The cutting of tax rates started with John F. Kennedy in the early 1960s, The rate of GDP growth has generally been declining since then. John Ross provides a number of graphs in illustration, two shown below:
Econintersect: Don't fall into a ceteris paribus trap here. There is far too little information to establish cause and effect. Many other things have changed over the last half century, including the creation of many advanced economies that were much smaller relative to the U.S. in the years after the second world war and the demographics of the U.S. have changed, just to cite two big factors. The only statement that stands is that the tax codes have changed to increase the advantage of extraction from corporations relative to re-investing for growth. We can offer a counter argument to that assertion and that is that the "extraction" from one corporation might well be the starting capitalization for a new one.
This entire issue deserves a lot more attention to explore the ceteris non paribus aspects of the financial markets performance in the most recent decades.
A Labor Day Perspective: The Growth of our Services Economy (Doug Short, Advisor perspectives dshort.com) The decline of GDP growth rates over time coincides with the decline in manufacturing employment. Again it is tempting to jump to a conclusion that manufacturing jobs are better contributors to GDP than are service sector jobs, but that would be another ceteris paribus error.
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