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What We Read Today 07 February 2016

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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Topics today include:

  • Shipowners in Distress

  • Global Negative Policy Rates

  • Minimum Wage and Public Assistance

  • History of the Fed Funds Rate (Cartoon)

  • French and Turkish Refugee Camps Compared

  • China's Declining Forex Reserves

  • Fall of the Military Welfare State

  • Welfare State for Liberals and Conservatives

  • Kludgeocracy in America

  • The Evolution and Complexity of Human Language

  • Is Vanguard a Tax Dodger?

  • Iran Taunts Saudi Arabia

  • North Korea Embarrasses China

Articles about events, conflicts and disease around the world

Global

  • Shipowners in financial distress as dry bulk crisis deepens (Financial Times)   Record low prices for transporting coal, iron ore and other dry bulk commodities by sea have pushed shipping companies into severe financial distress.  The suspension of payments to creditors and big write-offs by publicly listed entities are likely to reflect similar hidden crises at smaller, private operators that own most of the world’s vessels for carrying these products.   The collapse has dragged on far longer than anticipated, with average charter rates for dry bulk carriers — already at the lowest level since the Baltic Dry Index started in 1985 — declining every day so far in 2016.  Now the average daily charter rates are approximately 25% of operating costs.   Paul Slater, a veteran shipping financier based in Florida, said restructurings were vital for many companies.  However, companies were unlikely to seek Chapter 11 protection in the US — as many did in other recent market dips — because of the procedure’s high costs. Banks were also unlikely to offer much support because falling vessel values had eroded their value as collateral.

  • Negative Policy Rates (Twitter

U.S.

  • Water woes: Tap runs brown in Louisiana’s impoverished northeast (Al Jazeera)  With infrastructure funds going unspent, residents have lack of drinking supplies and iron sediment flowing from pipes.

  • DoD’s next challenge: managing the fall of our military welfare state (Fabius Maximus)  The military is often described as a test tube for American social science, running experiments such as integration of race, sex, and gender in its relatively controlled society. But the largest social science experiment in the military — perhaps the largest in US history — is DoD’s socialism. We close our eyes, preferring not to see it. Now the military’s spending priorities are changing (more technology and automation and less personnel), and we’ll see the effects on recruitment and retention as it is eroded away. Here Jennifer Mittelstadt explains the history and workings of the military “welfare state”.  See Welfare’s last stand (Aeon).

  • Balancing paychecks and public assistance (Economic Policy Institute)  Low minimum wages are a government funded support for businesses paying those wages.  As such it lowers costs paid by consumers and raises costs paid by taxpayers.  It is another form of income redistribution from those with incomes high enough to actually pay income taxes to all citizens who frequent the low-paying businesses - many who pay no income taxes.  This report suggests that higher minimum wages would reduce money spent on public assistance.  But it does not assess the cost impacts on those low income people from higher consumer costs.

  • Fed Funds Rate Since 1979 (Sober LookTwitter)

fed.funds.cartoon

France

france.turkey.refugees

Syria

  • Iranian commander mocks Saudi offer to intervene in Syria (CNN)   )Saudi Arabia's fresh public willingness to send ground troops into Syria is drawing ridicule from the kingdom's chief regional rival.  The commander of Iran's revolutionary guard on Saturday mocked Saudi Arabia's declaration that it is prepared to commit ground troops to fight ISIS in war-torn Syria.  Iran and Saudi Arabia, led by regimes representing opposing Islamic sects, already are bitter rivals. A years-long civil war in Syria has stoked tensions -- Iran is one of the Syrian regime's few allies, while Saudi Arabia has given financial aid and weapons to rebels.

India

apple.share.phones.india

China

  • China Struggles for Balance in Response to North Korea’s Boldness (The New York Times, CNBC)  The missile launch by North Korea gives China a big black eye.  When the veteran Chinese diplomat Wu Dawei left for North Korea last week, he most likely knew he had been dispatched on mission impossible: to persuade the country's young leader, Kim Jong-un, to climb down from his threat to launch a rocket as part of his quest to develop ballistic missile technologies.  Not only did Mr. Kim ignore China's entreaties, sending Mr. Wu home empty-handed. He did so emphatically, ordering the launch a day earlier than expected so that it fell on one of China's most hallowed holidays, the eve of the Lunar New Year. 

  • China’s Forex Reserves Plunge to More Than Three-Year Low (The Wall Street Journal, Twitter)

Other Economics and Business Items of Note and Miscellanea

  • What Liberals and Conservatives Need to Know About the Welfare State (Evonomics)  Samuel Hammond, a fellow in Economics at the Mercatus Center, George Mason University, writes that there is relationship between safety nets and social capital.  Two summary excerpts:

    On the right, the deep source of creeping atomism is the all-encompassing, bureaucratized welfare state. Redistribution in this view is inherently trust-reducing due to its zero-sumness (Mary robbing Peter to pay Paul). For example, its argued that universal social programs crowd-out private safety-nets, like religious organizations or the family, destroying unseen pro-social externalities. In some accounts this merely accelerates a feedback loop of eroding social norms that was initiated the second Western Civilization embraced value pluralism.

    [M]any on the left have come to similar conclusions, if only in a different vocabulary. Habermas, for example, has argued that state welfare systems “colonize” more natural forms of solidarity, contributing to their “reification” — an objectifying process by which implicit social relations are made explicit and impersonal, sapping them of their moral character.

    Econintersect:  "Social capital" is a term that applies to the collective value of all social networks.  It refers to the added productivity of a society arising from the collaberative efforts of individuals which dds to what each produces on his/her own initiative.  It is what GEI regular Roger Erickson calls "return on coordination".  If you want just one example that expresses the concept very simply, think of the U.S. interstate highway system.

    Hammond attributes the current disrepute of the welfare state among Americans to its inept design and implementation, using a term for it suggested by political scientist Steven M. Teles:  Kludgeocracy.  See next article.

  • Kludgeocracy in America (National Affairs)  Steven M. Teles, political science professor at Johns Hopkins University, says the problem with the U.S. is not that socialist (according to conservatives) or libertarians (according to progressives) have too much sway, but that "we have a form of government with no ideological justification whatsoever".  Because of our structure as a federal/state/local governing system and the vetos enabled by many checks and balances, we have a "more indirect and incoherent policy mechanisms than can be found in any comparable country".  This produces, according to Teres, "hidden, indirect, and frequently corrupt distribution of its [government] costs".  And although on the surface the two major political parties appear to have different positions on the role and the size of government, both are missing the kludgeocracy.  (Econintersect:  See demonstration sign pictured below.)   Teles writes:

Neither party is immune to the costs of kludgeocracy — the interests of both liberals and conservatives are ill-served by policy complexity. It hurts conservatives by concealing the true size of government. As Suzanne Mettler argues in her important recent book The Submerged State, our complex, hidden welfare state obscures government action, leading citizens to mistake as "private" programs that are in fact pervasively shaped by government. Mettler's research shows, for instance, that Americans who benefit from education-savings programs run through the tax code (like 529 plans) do not experience them as government at all, despite the fact that they redistribute huge sums of money. The same is true for the deduction for employer-provided health care and a variety of other pieces of the welfare state hidden in the tax and regulatory codes. This perpetuates the national myth of radical individualism and independence while creating the impression that only other, less deserving people draw upon government largess.

keep.gov.out.of.my.medicare

  • How humans evolved language, and who said what first (New Scientist)  Language is inherently symbolic, sounds stand for words and words represent who we are - both collectively and as individuals.  And yet language is often operating on the boundary between vague thought and full consciousness.  Language is a full expression of human complexity.  (to read the full article, a subscription is required.)  Here is the introduction:

Language is a powerful piece of social technology. It conveys your thoughts as coded puffs of air or dozens of drawn symbols, to be decoded by someone else. It can move information about the past, present and future, formalise ideas, trigger action, persuade, cajole and deceive.

Today, there are 7102 such codes spoken around the world. All human societies have language, and no language is “better” than any other: all can communicate the full range of human experience. To those of us who study human evolution, this incredible universality suggests that our species has had language right from when Homo sapiens arose in Africa between 200,000 and 160,000 years ago. A more recent origin could not explain how groups that stayed in Africa after H. sapiens migrated to the rest of the world 60,000 years ago also have language.

If H. sapiens has always had language, could other extinct human species have had it too? Some believe that Neanderthals did – which would imply we both inherited it from our common ancestor some 500,000 or more years ago. This theory is consistent with the discovery that FOXP2, a gene that is essential to speech, is identical at two key positions in humans and Neanderthals but different in chimpanzees. But a single gene is not enough to explain language. And recent genetic evidence shows that the Neanderthal brain regulated its version of FOXP2 differently.

  • Vanguard, a Champion of Low Fees, Faces a Peculiar Tax Challenge (The New York Times)  Vanguard’s overall fees are the lowest in the industry, according to Morningstar. Its funds’ average expense ratio is only 0.16% annually, compared with 1.16% for the industry.  That is because Vanguard is a mutual company, owned by its shareholders. That 1% difference may not sound like much, but it is. One extra percentage point in annual fees compounded over a lifetime can shrink your retirement nest egg by 40%.  David Danon, a former Vanguard tax lawyer, says in whistle-blower claims against Vanguard filed with the I.R.S. and other authorities that the company should pay taxes based on the income it would have received had it charged what profit seeking competitors collect. The I.R.S. won’t comment on the claims, and John Woerth, a spokesman for Vanguard, said, “Vanguard believes they are without merit”.  Here is an excerpt from the discussion of the minutiae:

Mr. Danon and Reuven S. Avi-Yonah, a University of Michigan law professor who has served as Mr. Danon’s paid expert, have some intriguing arguments, if you are partial to this sort of thing. The issue is technical, so bear with me: Mr. Danon says that because the Vanguard Group was set up as a “C corporation,” and not a partnership, it has potential tax liabilities, even if it does not actually earn a profit. And because it is owned by its mutual funds, for tax purposes, he says, it is required to account for the profits that it could have earned if it had charged the higher fees that the marketplace would have borne.

“This is a classic transfer-pricing issue,” Professor Avi-Yonah says. “The law is very clear.”

Transfer-pricing tax problems typically come up when American corporations apportion income to their foreign subsidiaries to minimize domestic taxes. Professor Avi-Yonah is a prominent expert on this subject and has discussed it eloquently in congressional hearings. Companies like Apple, Microsoft, General Electric and Pfizer have been skillful practitioners of it. Sometimes such companies run afoul of the rules. In 2006, for example, GlaxoSmithKline reached a $3.4 billion settlement with the I.R.S. in what the agency then called the largest transfer-pricing dispute in its history.

On technical grounds, the I.R.S. “could surely win in court” if it applied transfer-pricing rules in the Vanguard case, Professor Avi-Yonah said.

Not everyone is sure of that, though. David M. Schizer, a professor and dean emeritus at Columbia Law School, put the matter succinctly. “The transfer-pricing rules are intended to capture economic reality and not distort it,” he said, adding that they weren’t intended to apply in a situation like this and result in taxes when no profit existed.


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