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What We Read Today 09 December 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 (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.

Japan’s Recession Deepens as Election Looms for Abe (Keiko Ujikane and Toru Fu, Bloomberg Businessweek)  The Japanese recession was deeper in 3Q 2014 than indicated by the initial estimate.  The latest reading is an anualized decline of 1.9% compared to the previous estimate of 1.6% and much below economists' estimate of only 0.5%.  Analysts are projecting that the recovery will be weak as consumers are still reeling from the ill-conceived 60% hike in the consumption tax that took effect the first day of the second quarter.

California Drought Of 2012-2014 Is The Worst In 1,200 Years: Study (Kukil Bora, International Business Times)  Daniel Griffin, an assistant professor in the Department of Geography, Environment and Society at the University of Minnesota, and Kevin Anchukaitis, an assistant scientist at Woods Hole Oceanographic Institution used old blue oak tree-ring samples in southern and central California and climate data provided by the National Oceanic and Atmospheric Administration (NOAA) to determine that California's three-year drought was the worst in more than a millennium.  See also Evidence Suggests California's Drought is the Worst in 1,200 Years (Woods Hole Oceanographic Institute).  Another research study has found that for other parts of the U.S. one of the years of the dust bowl had the worst drought in a millenium.  See NASA Study Finds 1934 Had Worst Drought of Last Thousand Years (NASA News).  The 1934 drought,  which affected 71.6% of the western U.S., was 30% more severe than the second worst drought in the last 1,000 years, the drought of 1580.  For comparison to 1934, the recent 2012 extreme drought in the central U.S. had "an average extent" 59.7%.

Articles about events, conflicts and disease around the world


Federal autopsy released in Ferguson shooting (Associated Press, Fox News)

Ferguson grand jury documents support earlier data (CBS News)

Ferguson, Eric Garner Protesters Clash With Police Across Country (abc News)


British Ebola survivor calls Band Aid 30 “cringeworthy” (BBC Newsbeat)

A Very Simple Treatment For Ebola That Not Enough People Are Talking About (Think Progress)


"Turk Stream": Huge Win for Turkey - Big Win For Russia - Historic Loss for EU (Russia Insider) Hat tip to Rob Carter.

Turkish soldiers killed on Syria border (Al Jazeera)


At least 20 Australians killed in Syria and Iraq fighting for terrorist groups, Brandis says (

Syria, allies condemn Israeli airstrikes (Associated Press, Yahoo! News)


Islamic State: Coalition 'pledges more troops' for Iraq (BBC News)


ISIL and Iran to dominate Gulf Arab summit (Al Jazeera)

U.S. Accuses Iran of Secretly Breaching U.N. Nuclear Sanctions (Foreign Policy)  Washington has evidence that Tehran is trying to buy new equipment for a key nuclear facility. But the White House isn't willing to say anything publicly about it.


Ukraine's Made-in-USA Finance Minister (Global Research) Hat tip to Rob Carter.  She appears to be corrupt to the core – good fit for Ukraine’s tradition.


Russian Inspectors to Conduct Observation Flight Over US (

You Want a Bigger Paycheck? Convince Me. (Noah Smith, Bloomberg View)   In textbook economics, your wage is equal to the marginal productivity of the company that hires you. That means that you get paid an amount equal to the amount that the company’s production increases when it hires you.  But that has nothing to do with reality.  Smith points out that you get paid only “what you can convince other people to pay you”.  In Smith’s view, there is no such thing as a ”fair wage” or for getting paid for what we produce.  Econintersect:  The logical extension (not stated by Smith) is that you will get paid whatever you are able to bargain for.  Thus the decline in labor share of the economy since 1970 may well correlate with the decline of labor unions.  Now whether labor unions serve to decrease the efficiency of an economy is another related question (that may well be the case), it is hard to argue that the loss of influence of unions may be a factor in the increase in return to capital and the decrease in the return to labor in recent decades.  Back to Smith:  The article suggests that increases in automation and globalization of the labor market may both have had a role in the decline in the labor share of GDP.  For a detailed data review, see GEI AnalysisPrivate Investment:  Between a Rock and a Hard Place.


China advisers recommend 7 percent growth goal in 2015 as leaders meet (Kevin Yao, Reuters) China looks set to fall short of its 7.5% growth target for 2014 and key economic advisors are recommending the target for 2015 be cut to 7.0%.  A senior economist from the Chinese Academy of Social Sciences (CASS), who declined to be identified, is quoted by Reuters:

"President Xi (Jinping) has already hinted at the growth target when he said growth of seven percent is the highest in the world.  I think it should be seven percent if there are no more surprises. But it cannot be lower than seven percent, otherwise there could be employment problems and debt default problems."

If China is to achieve its objective of reducing investment from 45% of GDP (the highest level in the world) and increasing domestic consumption from the current level 0f 35% of GDP to the OECD average of about 60%, it will have to reduce GDP growth much below7%.  Michael Pettis thinks it will have to average around 3% long-term.  Econintersect suggests that very long-term (2040 and beyond) when China will pass peak population and start losing population ( and increasing the elderly percentage demographic) that GDP growth will be much less than 3%.  China will end up looking like Japan for many of the same reasons:  high debt, increasing elderly population and shrinking total population.  See next article for a discussion of China’s near-term problems.

China has ‘wasted’ $6.8tn in investment, warn Beijing researchers (Jamil Anderlini, Financial Times)  This is repeated from 01 December 2014 WWRT.  Chinese government economic researchers have found what they call "ineffective investment" from 2009 through 2013. The analysis shows that "empty apartment blocks, abandoned highways and mothballed steel mills sprawl across China’s landscape" amount to $6.8 trillion of "wasted investment" over the five years. They attribute much of the waste to massive government stimulus following the Great Financial Crisis of 2008. The two economists, Xu Ce (National Development and Reform Commission) and Wang Yuan (Academy of Macroeconomic Research) say:

"Investment efficiency has fallen dramatically [in recent years]. It has become far more obvious in the wake of the global financial crisis and has caused a lot of over-investment and waste."

Further examination of their data suggests there are more nuances in the Chinese data than Xu and Wang have revealed. See today's article What You Need to Know about Investment in China in 8 Charts (GEI Analysis). See also China's $6.8-trillion hole? (S.R., The Economist) and the original paper: Inefficient and ineffective investment causing a huge waste (Xu Ce and Wang Yuan, Shanghai Securities News - in Chinese).

But the Xu and Wang research is not the only work that is identifying waste and inefficiency in the Chinese economy. Other work is reported by Anderlini:

Jonathan Anderson, founder of Emerging Advisors Group, the consultancy, estimates that about $1tn has gone missing in China in the past half-decade as a result of weak oversight and the enormous opportunity provided by the investment boom. "That translates into maybe 5 per cent of GDP per year worth of skimming off the top," he says.

"Think about it: every local government wakes up one morning in 2009 and finds that the central authorities have lifted every single form of credit restriction in the economy," he says. "With no one watching the till, it would be awfully hard to resist the temptation to sidetrack the funds, squirreling them away in related official accounts or paying them out through padded contracts to other connected suppliers and friends."

Is it any wonder that China is looking all over the world for ex-pat government officials as well as at home? See China Seeks More U.S. Help to Return Fugitive Corrupt Officials (Edmond Lococo and Ting Shi, Bloomberg) and China shames 'most fashionable' corrupt officials (Tom Phillips, The Telegraph).

The Index of Economic Freedom suggests Economic Freedom is Unimportant for Growth (Corrections:  Page One)  This note test the hypothesis that the correlation of Economic Freedom with GDP has nay causation possibility.  If there were a causation effect (in either direction - freedom causes faster growth  or vice versa) then changes in fredom should correlate with cghanges in GDP growth.  Mind you, such correlation would not prove causation; but no correlation would prove lack of causation.  The analysis here found that the regression fit of the data is worse than pure random chance - which really proves no causation with an exclamation point!

The Fiscal Burden of Illegal Immigration on U.S. Taxpayers (2010, Updated 2011) (Fedreation for American immigration Reform)  This is a careful detailed accounting of the government costs incurred by and the taxes paid by illegal aliens.  The conclusion is that the cost to governments (local, state and federal) is far greater than the taxes paid.  The esitimate?  A total cost of $113 billion per year, of which $84 billion is born by state and local governments.  The study says the costs "are misleading as an offset because over time unemployed and underemployed U.S. workers would replace illegal alien workers".

Econintersect:  The last quote above is specious, basically an assumption.  Many undocumented workers are doing jobs that would never be done by other U.S. residents.  How many non-immigrants will work in the California agricultural fields, for example.  Other assumptions are made without adequate justification.  For example, it is assumed half of illegal immigrants earn $31,200 per year and the other half are in the underground economy paying few taxes.  Is that justified?  Finally, nowhere is there an estimate of the value of the work done by these people.  The implicit assumption is that the value is the compensation assumed to be paid to them.  Could the value be greater than that?  This is a good question that should be addressed.

Illegal immigrants benefit the U.S. economy (H.A. Goodman, The Hill)  Two excerpts:

There are few subjects that evoke as much emotion as immigration reform, especially since future laws could result in a path to citizenship for over 11 million illegal immigrants.

When analyzed from the vantage point of information derived from reputable, nonpartisan sources (the Pew Research Center, USDA, United States Department of Labor, and leading economists and researchers) then one can obtain a clearer view of this muddled discussion. The truth of the matter is that illegal immigrants are important to the U.S. economy, as well as vital to certain industries like agriculture.

According to the Pew Research Hispanic Trends Project, there were 8.4 million unauthorized immigrants employed in the U.S.; representing 5.2 percent of the U.S. labor force (an increase from 3.8 percent in 2000). Their importance was highlighted in a report by Texas Comptroller Susan Combs that stated, “Without the undocumented population, Texas’ work force would decrease by 6.3 percent” and Texas’ gross state product would decrease by 2.1 percent.  Furthermore, certain segments of the U.S. economy, like agriculture, are entirely dependent upon illegal immigrants.

The U.S. Department of Agriculture states that, “about half of the hired workers employed in U.S. crop agriculture were unauthorized, with the overwhelming majority of these workers coming from Mexico.” The USDA has also warned that, “any potential immigration reform could have significant impacts on the U.S. fruit and vegetable industry.” From the perspective of National Milk Producers Federation in 2009, retail milk prices would increase by 61 percent if its immigrant labor force were to be eliminated. 

Echoing the Department of Labor, the USDA, and the National Milk Producers Federation, agricultural labor economist James S. Holt made the following statement to Congress in 2007: “The reality, however, is that if we deported a substantial number of undocumented farm workers, there would be a tremendous labor shortage.”

But what about the immense strain on social services and money spent on welfare for these law breakers? The Congressional Budget Office in 2007 answered this question in the following manner: “Over the past two decades, most efforts to estimate the fiscal impact of immigration in the United States have concluded that, in aggregate and over the long term, tax revenues of all types generated by immigrants—both legal and unauthorized—exceed the cost of the services they use.”  According to the New York Times, the chief actuary of the Social Security Administration claims that undocumented workers have contributed close to 10% ($300 billion) of the Social Security Trust Fund.

Finally, the aggregate economic impact of illegal immigration is debatable, but any claim that they’ve ruined the country doesn’t correlate to the views of any notable economist. An open letter to President George W. Bush in 2006, signed by around five hundred economists (including five Nobel laureates) stated the following:  “While a small percentage of native-born Americans may be harmed by immigration, vastly more Americans benefit from the contributions that immigrants make to our economy, including lower consumer prices.”

The following two articles raise some tough additional questions about the economic costs of illegal immigration.

How 4 Mexican Immigrant Kids and Their Cheap Robot Beat MIT (Joshua Davis, Wired) Article is from 2005.

The True Story of the Kids Who Beat MIT’s Best Robots, Coming Soon to Theaters (Wired)  Ten years after article above.

Ratio of Part-Time Employed Remains Substantially Higher Than the Pre-Recession Level (Doug Short, Advisor Perspectives  Doug Short contributes to GEI.  The Great recession created a sharp dislocationin the balance between full-time and part-time employment.  There has been a gradual relaxation of the extreme distortion of the historical relationship whicgpeaked January 2010.  If a linear extrapolation is made (for which we offer no justification) it will take a total of 11 eleven years (in 2021) to get back to the pre-recession condition.  What could prevent that from happening?  Another recession is one thiong.  In recessions the red line tends to increase and the blue to go down.  So it might take a lot longer than 11 years to recover 2007 conditions, if they are ever recovered.


Slain MassMutual Executive Held Wall Street “Trade Secrets” (Pan Martens and Russ Martens, Wall Street on Parade)  The martens report on what appears to be a racket conducted by large banks involving grossly over insuring the lives of their senior employees.  The process is known as BOLI, shorthand for Bank-Owned Life Insurance, a controversial practice where banks purchase bulk life insurance on the lives of their workers. The death benefit pays to the bank instead of to the family of the deceased.  The justification is that the bank should be compensated for "trade secrets" known only to the various insured employees should they become deceased.  The Martens clain that the amount of life insurance in force is many times greater than the asset value presumably insured.  When they tried to get information from the bank regulator involved, the Office of the Comptroller of the Currency (OCC), they were refused:

The OCC responded to our request on April 18, 2014, advising that they did have documents responsive to our request but that all documents were going to be withheld because they were “privileged or contains trade secrets, or commercial or financial information, furnished in confidence, that relates to the business, personal, or financial affairs of any person,” or  relate to “a record contained in or related to an examination.” (See OCC Response to Wall Street On Parade’s Request for Banker Death Information).

It is noteworthy that JPMorgan Chase, Bank of America, Wells Fargo and Citigroup are all publicly traded companies with shareholders. Under securities law, shareholders have a right to material information on how the company is making its profits. An investor who wants to own the shares of a well-run bank whose business model is to make prudent loans to businesses or loans to responsible retail customers, should have a right to know how much of a bank’s profits are coming from the unseemly practice of collecting death benefits on its workers.

The Martens point out that a number of senior but young bank executives have died under unusual circumstances, often officially "suicide".   These deaths have been very profitable to the banks but the details are not being divulged.

The Fix: America’s reddest and bluest places (Philip Bump, The Washington Post)  In about half the country (by land area) there is no political competition between parties.  If Alaska is excuded from the competitive areas, well over half the land mass is "a lock" politically.

Click for large image.

Other Economics and Business Items of Note and Miscellanea

Yet Another Washington “Watchdog” Is Nothing But a Beltway Pussycat (Shah Gilani, Wall Street Insights & indictments)  GEI contributor.

What Women Could Bring To The Dismal (And Sexist) Science Of Economics (Forbes)

How economics is like 1950s Freudian psychology (The Washington Post)

Economists Aren’t As Nonpartisan As We Think (FiveThirtyEight Economics)

Economics of ‘memento mori’ (The Japan Times)

U.K.’s Huge Banking Sector Likely to Get Bigger (The Wall Street Journal)

Economists see revved-up US economy next year (CNBC)  Is that a warning sign?

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