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What We Read Today 05 October 2015

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.

This feature is published every day late afternoon New York time. For early morning review of headlines see "The Early Bird" published every day in the early am at GEI News (membership not required for access to "The Early Bird".).

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Articles about events, conflicts and disease around the world

Global

  • Caterpillar to Cut Up to 10,000 Jobs, Citing Falling Demand (The New York Times)  There is no better proxy for global construction and mining activity than the heavy equipment manufacturer Caterpillar.  The company is cutting 9% of its global workforce (10,000 workers) due to declining business.
  • Negotiators strike Pacific trade deal (Financial Times, CNBC)  The US, Japan and 10 other Pacific Rim economies have reached agreement to strike the largest trade pact seen anywhere in two decades, in what is a huge strategic and political win for US President Barack Obama and Japan's Shinzo Abe.  The Trans-Pacific Partnership covers some 40% of the global economy and will create a new Pacific economic bloc with reduced trade barriers relating to the flow of everything from beef and dairy products to textiles and data as well as new standards and rules for investment, the environment and labor. Econintersect: However, some say this is not about trade but control for a select global oligarchy.  See (from Early Bird this morning):  The Trans-Pacific Free-Trade Charade (Joseph Stiglitz and Adam Hersh, Project Syndicate).   See more under U.S. below.

U.S.

  • Dollar’s Surge Against Other Currencies Weighs Down United States’ Economy (The New York Times)  Hat tip to Rob Carter.  Ever since the American dollar began to surge against foreign currencies late last year, economists have warned that the repercussions would eventually be felt on the home front.  With Friday’s Labor Department report showing slower hiring than expected in September, and the weaker data on exports and factory activity released earlier in the week, evidence of the effects of the dollar’s rise on the domestic economy is piling up.  Will this force the Fed to wait until 2016 before raising interest rates?  Raising rates will just drive the dollar higher.
  • Historic Pacific trade deal faces skeptics in Congress (Reuters)  Twelve Pacific Rim countries on Monday reached the most ambitious trade pact in a generation, aiming to liberalize commerce in 40 percent of the world's economy in a deal that faces skepticism from U.S. lawmakers.  See more under Global above.

Click for Reuters news video.

  • Recommendation on Bergdahl desertion case kept secret (Associated Press)  Sgt. Bowe Bergdahl is charged with desertion and misbehavior before the enemy for walking away from his post and being captured by the Taliban in Aghanistan in 2009.  An Army officer's recommendation on whether Bergdahl should face a court-martial will remain secret for now.
  • Policy Makers Skeptical on Preventing Financial Crisis (The New York Times)  Hat tip to Rob Carter.  The 2008 financial crisis convinced most people in the world of central banking that it would be a good idea to try to prevent that kind of thing from happening again.  But policy makers have made little progress in figuring out how they might actually do so, a troubling reality highlighted at a conference that ended over the weekend at the Federal Reserve Bank of Boston.  Reservations were expressed by (among others) Fed Vice Chair Stanley Fisher, New Yor Fed President William C. Cuckey and Boston Fed President Eric Rosengren.  See also (from today's Early Bird) U.S. system designed to prevent financial crisis 'likely to fail,' say experts (MarketWatch) which quotes Adam Posen, president of the Peterson Institute for International Economics:

"The current U.S. institutional set-up is likely to fail in a crisis, and will be doing less to prevent a crisis than it should be."  

UK

  • U.K. Services Downturn May Keep BOE Cautious on Interest Rates (Bloomberg)  U.K. services growth faltered in September, highlighting the fallout from global economic weakness that may push Bank of England policy makers to adopt a cautious tone when they gather for their monthly meeting.  A report from Markit Economics published today showed that services grew at the slowest pace in more than two years in September.  See also next article.

uk.services.pmi.2015.sept

  • U.K. Sept. Manufacturing PMI Falls to 51.5 (Bloomberg)  The Manufacturing PMI (Purchasing Managers' Index) for September in the UK remained above 50 (below 50 indicates contraction) but the failure for the reading to advance has produced an interpretation of "stagnation".  

Turkey

  • NATO denounces Russian incursion into Turkish airspace (Reuters)  The United States and NATO denounced Russia on Monday for violating Turkish airspace and Ankara threatened to respond, reporting two incursions in two days and raising the prospect of direct confrontation between the former Cold War adversaries.

Saudi Arabia

  • US judge dismisses 9/11 case against Saudi Arabia (Al Jazeera)  Hat tip to rjs.  In case you missed this nearly month-old story:  Judge throws out case filed by victims' families, saying Saudi Arabia cannot be sued due to sovereign immunity.  See also related story which follows below.`
  • US politicians call for release of secret 9/11 report (Al Jazeera)  Hat tip to rjs.  Another story we missed this summer:  White House urged to release 28-pages of classified information alleging Saudi officials helped finance attacks.  Several members of the US Congress have joined calls for the release of classified pages from an intelligence report into the September 11, 2001, attacks on the US. 

Iraq

  • Iraq violence: More than 60 people killed in bombings (BBC News)  At least 63 people have been killed in a series of car bomb attacks in Iraq, police and medical sources say.One of the largest bombs was in the Shia-majority town of Khalis in the eastern province of Diyala, where at least 40 people were killed.Another attack in the town of al-Zubair, about 15km (9 miles) south-west of the oil town of Basra, is reported to have killed at least 10 people.A third bomb in Baghdad killed at least 13 people, police said.

Afghanistan

  • US says Afghans asked for air strike at Kunduz hospital (Al Jazeera)  Head of US forces in Afghanistan promises transparent probe but medical charity MSF (Doctors Without Borders) demands independent probe.  Afghan forces who said they were under Taliban fire asked for the US air strike that killed 22 people at a hospital in Kunduz, according to the US commander. 

Here's How Much 11 Popular Investment Firms Charge in Fees (Twocents Lifehacker)  Numerous studies have shown that holding down expenses in a portfolio can make a big difference in returns over many years.  Here is a graph showing average expense ratios for mutual funds and ETFs (electronically traded funds) at a number of brokerages.  For a complete expose on fees of all kinds, see the white paper The Real Cost of Fees (Personal Capital) which is the source of the graph below.  The author notes:

Vanguard wasn’t included in their roundup, and Vanguard funds are known for having incredibly low expense ratios. According to Vanguard, their average ratio is a mere 0.18 percent. The numbers are interesting to look at, but if your brokerage firm isn’t on this list, you can use a tool like FeeX to see exactly how much you’re paying in fees. 

ave.expense.ratios.MF.ETF.brokerage


Guns killed more Americans in 12 years than AIDS, war, and illegal drug overdoses combined (Vox)

guns.kill.more 


Growth of the Financial Sector (MacroPru, Twitter)  Econintersect:  The tail has grown to wag the dog.

Other Economics and Business Items of Note and Miscellanea

  • A Tax to Curb Excessive Trading Could Be a Boon to Returns (The New York Times)  This column discusses a Bernie Sanders proposal to tax security transactions, but only those that meet certain frequency criteria.  Individual investors (excluding day traders) would not be directly effected by this tax but might suffer some burden through mutual fund investments.  There are proposals to mitigate that impact but it is likely that costs might still come through.  But this commentator thinks that would be worth it in the long run:

There are all sorts of ways that this tax may cost many investors money in the long run. But considering its potential virtues, it is a useful exercise because it’s akin to a sin tax. Trading too much hurts returns and is extremely hazardous to our wealth, and the less we do of it, the better off most of us will be.

“There is no strong evidence of a positive impact of TSR plans on firm performance.”

  • New research shows raising the top income tax rate won’t reduce inequality (Brookings)  One policy option that has generated significant attention, and will likely continue to do so in the lead-up to the 2016 election, is increasing income taxes on top earners, and in turn giving those funds to those on the bottom. It sounds like simple math, and has an allure for many politicians and American families alike, but new Brookings research suggests that this proposal would actually do little to reduce inequality.  For more see Would a significant increase in the top income tax rate substantially alter income inequality? (William G. Gale, Melissa S. Kearney and Peter R. Orzag, Brookings).

     Econintersect:  This is an example of research which is useful in the narrow area of the question addressed:  How effective is taxation for income redistribution?  The answer is clear (but most rational beings would have thought this was the case without the research):  Taxing the rich and redistributing the added government revenue to the poor is not an effective means of addressing income inequality.  The more important (and much more difficult) question:  How would higher marginal tax rates on the wealthy change their behavior?  A clue to an answer is found when looking back at the 50% top rates under Kennedy and the much higher rates from the early 1940s up to 1961 (up to 92% top bracket).  During those years great wealth was accumulated, even at the very top.  But it was not in the form of cash (salaries and bonuses) - it was in equity.  Much more wealth was accumulated by reinvesting a million dollars in a business rather than withdrawing it as personal income, which would have netted only $80,000 in wealth after federal taxes.  Those punitive tax codes changed human behavior.   And what was the result for the economy?  Businesses grew, employment grew and consumption grew:  This is exactly the result desired today. 

    Of course our economy is much different today 60-70 years ago.  Would high top level marginal rates have the same effect today as they did back then?  The answer is problematic.  Back then we had a manufacturing based economy with intensive human capital (labor).  Today manufacturing is a smaller part of the economy and significantly robotic and automated.  Investing more in this age could improve the efficiency of automation with little impact on income distribution (if any it might be negative with even fewer humans needed to conduct manufacturing).  And finance is much more dominant in the economy today than manufacturing.  What could incentivizing more reinvestment in financial  engineering do (compared to the current practice of withdrawing large salaries and bonuses)?  Certainly not much to impact income redistribution by increasing employment.

    Much more radical thinking is necessary than simply adjusting the tax code if a growing and prosperous middle class is to reemerge from the current morass.

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