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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.
Break Up Citigroup (Simon Johnson, Project Syndicate) Citigroup led a successful effort to get key elements of Dodd-Frank overturned by attachments to the latest budget bill. Johnson says they may have won a battle but it could lead to losing a war and become the fulcrum for action to break up big banks. He says it is not just the very vocal Elizabeth Warren that is thinking this way but a number of other senators in both parties could be brought into the fray.
Fed Hands Record $98.7 Billion Back to Treasury (Michael S. Derby, The Wall Street Journal) The Fed earned $115.9 billion on its Treasury securities and MBS (mortgage backed securities) holdings in 2014. By law, after "expenses" and a 6% dividend to member banks is paid the rest is remitted to the U.S. Treasury. Many think this is great for the government, reducing the current deficits but Econintersect suggests it is economically damaging when there is slack in the economy because it is removing more than $100 billion from the "real economy" that would have been paid to the public (albeit some of the payments would have gone to banks). The effect was to reduce GDP for 2014 by about 0.6%.
WSJ Praises the "Triumph of Austerity" in Greece (The Real News Network) Sharmini Perez interviews William K. Black (who has contributed to GEI). Black criticizes The Wall Street Journal (and The New York Times as well) for portraying the political "rebellion" in Greece against austerity as "snatching defeat from triumph". The headline link takes you to the transcript of the interview.
Articles about events, conflicts and disease around the world
AirAsia Flight 8501
Five Decades of Middle Class Earnings: Update (Doug Short, Advisor Perspectives dshort.com) Doug Short is a regular contributor to GEI. This is a grim reminder of the hollowing out of the American middle class. There are several excellent graphs in the article in addition to the one below. What we see is a cascade downward from 1973 to 1982 followed by a more gradual decline to 1991. Once nearly 1/4 in the real wage income of workers had been removed a new phase of cutting back labor share of the economy was begun. In 1990s and later other forms of economic benefit were removed. Two examples: Company-paid defined benefit pensions were phased out; and employee contribution to health insurance was phased in. Working for a living and building a future became more like working for survival. Working for survival does not build a middle class, as has been demonstrated.
Why the Fed Worries About Others (Mohamed A. El-Erian, Bloomberg View) El-Erian points out how the formerly closed U.S. economy has changed over recent years. U.S. exports have increased to 14% of GDP - an jump of nearly 50% since 2005. And the trade is much greater outside of NAFTA (North America Free Trade Agreement) than within it. He also points out how interwoven the global financial markets have become. And El-Erian says the Fed recognizes this. He concludes this short column:
...the U.S. isn't an isolated economic and financial island. The multiyear American war to overcome the terrible legacy of the global financial crisis now involves a consequential battle against weakness in the rest of the world. And the growing divergence between its domestic prospects and those of the rest of the world has become one of the most important uncertainties facing the global economy and markets in 2015.
Gross Says Wage Growth Isn't Great Enough to Sustain U.S. Expansion (Liz Capo McCormick, Bloomberg) At current levels of wage growth (1.7% over the most recent 12 months) Gross says that the U.S. economy cannot be "sustained". He doesn't define what he means by "sustain", but Econintersect would suggest that he means that 1.7% growth for 70% of the economy (personal consumption) only adds 1.25% to GDP in nominal terms and that is less than the rate of inflation. So in real terms 1.7% wage growth is subtracting from real GDP growth. He does suggest that 3% to 3.5% annual wage growth is needed if the Fed achieves the target GDP growth of 2%. Looking at those numbers we see that would be about 1.5% real wage growth (for nominal 3.5%) which would add about 1% to annual GDP growth. Thus our inference is that Gross thinks that sustainability requires between 1% and 2% real GDP growth annually.
The Real Story of How America Became an Economic Superpower (David Frum, The Atlantic) This article is a must read.
Very rarely, you read a book that inspires you to see a familiar story in an entirely different way. So it was with Adam Tooze’s astonishing economic history of World War II, The Wages of Destruction. And so it is again with his economic history of the First World War and its aftermath, The Deluge. They amount together to a new history of the 20th century: the American century, which according to Tooze began not in 1945 but in 1916, the year U.S. output overtook that of the entire British empire.
The One Stock I Would Build A Retirement Portfolio Upon At Any Age (Alan Saltzman, Regarded Solutions, Seeking Alpha) This article was submitted for discussion at the GEI LinkedIn Group. Saltzman has as a key element of his recommendation the acquisition by AT&T (NYSE:T) of DirecTV (NASDAQ:DTV) with its NFL contract with specific presentation formats to support fantasy football leagues, "estimated ... worth $70 billion all by itself!" Econintersect: This may be a great cash cow right now but does it have a 'moat', as Warren Buffett would say, protecting it from being displaced by another contract with another company with a competing (or superior) process? Disclosure: The managing editor owns Verizon (NYSE:VX) and does not own AT&T.
Thoughts on “Teaching Economics After the Crash” (Karl Whelan, medium.com) Both interesting and unsettliing. Whelan tries to be insightful and critical and ends up sounding like a mainstream apologist who is lacking in vision. He had criticism for Steve Keen but gave no evidence that he had any real understanding of what Steve Keen is doing or what extensions from his work might be possible. He criticizes Keen's work for dealing with analysis systems that are unstable. That's the point of the work: the real world is unstable! Whelan also says that Keen's assumptions and definitions are "odd". Is Whelan referring to rules of accounting? The basic assumptions involved are that double entry accounting defines real world stocks and flows. This read like a critique by an observer of mechanics who had never tried to use the wrenches.
Another aspect of the documentary that didn’t ring true to me was the idea — promoted by Steve Keen — that there are lots of alternative quantitative models of the role of credit in the economy that are very useful but just ignored by the mainstream for ideological reasons. I don’t see it this way.
Social Security Claiming Strategy Question: Restricted Application (Deborah Fox and Dustin Smith, Financial Planning Association LinkedIn Group) Does the surviving spouse of a higher income earning (and therefore higher SS benefit receiving) person deferring Social Security benefits to age 70 receive those higher benefits as survivor if the person dies before reaching age 70 and after the lower earning survivor has started receiving benefits either as beneficiary (50% of normal benefit) or in his/her own right? Hope you can follow that because it is a situation that can occur for many. The link below is http://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p89.html.
Other Economics and Business Items of Note and Miscellanea
NY Fed Survey Finds Big Banks Favored June Rate Rise Before December FOMC (The Wall Street Journal)
The Weird Contradiction in Obama's Plan to Help First-Time Home Buyers (Bloomberg Businessweek)
Allen: Harvard faculty gets schooled on economics of health care (Online Athens)
Mysuru traffic cop gets doctoral degree on economics (The Times of India)
Studying Economics: Of the Elites by the Elites (Social Scienc Space) Economics courses are being overhauled and, in some cases, dropped altogether.
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