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What We Read Today 23 March 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:

  • What's a Leveraged Buyout?

  • Jeffrey Frankel on Dealing with Inequality

  • Adam Smith Did Not Advocate Laissez-Faire Economics

  • Can the Scientific Method be Applied to Economics?

  • Is Bernie Sanders the Most Pro-Market Candidate?

  • Belgium Manhunt Intensifies

  • Americans are Still Missing in Brussels

  • Brexit's Questions for the Rest of Europe

  • Credit Suisse's Liquidity Death Spiral

  • The NRA is Weak on Guns

  • Global Inequality has Political Origins

  • And More

Articles about events, conflicts and disease around the world

Global

  • Why Global Inequality Matters (Branko Milanovic, Social Europe)  BM has contributed to GEI.  Milanovic says that the current inequality problems can be laid at the feet of the political left.  The reason inequality grew to an extreme is because the left has been absent from mainstream governance for nearly 40 years.  His bottom line:  To maintain economic balance requires political balance which has been lost.  Now there is a resurgence of the left but, because of extreme right-wing resurgence as well, it could well be snuffed out or at least kept weak.  Econintersect:  To extend from Milanovic's arguments we suggest it may be necessary to pave the ditches - no one will be using the middle of the road any more. 

U.S.

  • The No-Compromise Group That Thinks the NRA Is Weak on Guns (Bloomberg)   The really aggressive defender of gun rights is the National Association for Gun Rights (NAGR).  In quarterly lobbying disclosure filings, NAGR said it had two lobbyists, compared with the NRA’s dozen or more. It states its role plainly: run what it calls an “aggressive program” to mobilize opposition to firearms restrictions.  Its website solicits donations and has offered giveaways for events such as a helicopter-borne hunt for feral hogs, and a chance at a semi-automatic Barrett M82A1 (a rifle described by its manufacturer as offering “accurate firepower that never slows down").  The group specializes in appealing to “the low-information side of the pro-gun population,” said Dave Kopel, research director for the Denver-based Independence Institute, a policy group that supports limited government and has accepted funding from the NRA.  O’Dell deflects such criticism:

“Our effectiveness in mobilizing our members and supporters to push for expanded protections for the Second Amendment is sure to be a sore subject with the political class in Washington D.C. and state capitols across the country.”

  • Is Bernie Sanders the Most Pro-Market Candidate? (Evonomics)  Written by Guy Rolniik who is on the faculty of the Booth School of Business, University of Chicago, this essay says that Sanders offers the best program to improve competition in American markets.  Here is a damning statement about the state of the American economy made at the conclusion:

Whoever believes in a market economy assumes that players are “price takers” or “regulation takers”: they cannot influence the prices and the rules of the game. If we want to move into a more competitive market system, we should support the political revolution of Bernie Sanders, specifically the way he raises money. We must acknowledge that as long as it is totally within the norms, values, and beliefs of our society that politicians and regulators can take money from special interest groups, our chances of increasing the legitimacy of market ideas are diminishing.

  • Cash-Strapped Connecticut Wants to Tax Yale Endowments (Bloomberg)  Why should rich universities enjoy tax-exempt status when students are going deeply in debt?  That is the question behind a number of tax policy initiatives.  Yale University’s endowment earned $2.6 billion in investment gains in fiscal 2015. A proposed bill in the Ivy League school’s home state of Connecticut is eyeing a share of the bounty as a source of revenue.  Schools with funds of $10 billion or more -- affecting Yale only -- could face a tax on endowment income, according to legislation introduced this month. Yale’s record $25.6 billion fund is the second largest in U.S. higher education, behind Harvard University’s $37.6 billion.  The richest college endowments, many at their highest values ever, also have drawn scrutiny from federal lawmakers. Last month, the U.S. Senate Finance and House Ways and Means committees sent a joint inquiry to the richest 56 private schools about endowments, seeking to understand the impact of their tax-exempt status on the price tag of higher education, among other issues.  Yale's endowment is up more than 60% over the past 11 years and more than 50% in the last 6 years.

EU

  • Belgium Hunts for Ringleader as EU-Wide Terror Fears Mount (Bloomberg)   Belgian authorities hunted for the ringleader of Tuesday’s attacks in Brussels amid fears of a Europe-wide spread of Islamic terror networks with the capability to strike at will.  Prosecutors identified two of three suicide bombers as brothers Khalid and Brahim El Bakraoui as they searched for a fourth man in a cream-colored coat caught on security cameras who escaped from the airport after placing a bomb that didn’t go off. The provisional casualty toll at the airport and a downtown subway station of 31 dead and 270 injured is likely to rise.

  • Brexit’s Questions For The Rest Of Europe (Social Europe)   In three months, British citizens will have to decide whether or not to remain in the European Union. But they are not the only ones who must consider their political future. The upcoming referendum also poses two important questions for the rest of Europe.

The first question is which outcome Europeans would and should prefer. Some have already written off the United Kingdom, claiming that a partner that would consider leaving is not the kind of partner they want, anyway. Whether or not one shares this opinion, the point is worth studying. Indeed, it would be naive not to ask whether retaining a member that is challenging the very principle of European integration would really be in the EU’s best interests.

The second question that the referendum poses for Europeans is the same one that the British are addressing: Is EU membership worthwhile?

Centrifugal forces in the EU are stronger today than ever before, not only across the English Channel, but throughout the continent. Many countries have political movements and parties – some stronger than others – that are seeking to “recover” elements of sovereignty, to the detriment of common action. Some governments have even taken unilateral measures contrary to EU decisions.

Switzerland

  • Liquidity Death Spiral Traps Credit Suisse (Bloomberg)   Credit Suisse just got caught up in the same liquidity death spiral that has claimed a growing number of debt funds.  Some of the bank's traders increased holdings of distressed and other infrequently traded assets in recent months without telling some senior leaders.  Credit Suisse is in a tough spot because it is trying to get out of its hard-to-trade assets at a bad time. It's re-evaluating its business model under new leadership, higher capital requirements and the shadow of poor earnings.  Looking at banks in general, this author says good news so far is that trading woes for illiquid debt securities haven't yet triggered another credit crisis. The bad news is it's only getting harder to transact in riskier debt, making the market increasingly fragile and prone to seizures going forward.  See also Credit Suisse CEO Blindsided as Bank Added to Risky Positions (Bloomberg).

Turkey

  • Turkey: We deported suspected Brussels bomber (CNBC)  Turkish officials said Wednesday the country previously deported one of the suspected Brussels bombers, and authorities pressed the search for at least one other suspect in the deadly attack.  Ibrahim El Bakraoui was the man at the center of the surveillance image below. An official in the Turkish president's office said El Bakraoui was caught at the Syrian-Turkish border last June and deported to the Netherlands, the AP reported. 

 belgian.bombers

China

  • ‘Skyrocketing’ debt at state firms among biggest challenges facing China’s economy (South China Morning Post)  China's biggest debt problems are for SOEs (state owned enterprises).  Some of them are not only borrowing for investment but also to cover operating expenses and losses.

  • China likely to delist more problematic companies in 2016 (South China Morning Post)  China may force out more problematic listed companies in 2016 as Beijing strengthens the crackdown on market irregularities, and the Shanghai Stock Exchange on Monday for the first time delisted a company for breaching disclosure rules.  A regulatory source told the South China Morning Postthat China’s top securities watchdog, the China Securities Regulatory Commission (CSRC) has compiled a blacklist of 30 to 40 troublesome companies, and has been probing these companies, talking to local government officials, to push forward delisting of unqualified firms.


Fed Rate Hike Probabilities (Walter Kurtz, The Daily Shot)  The market is still only pricing a 63.5% probability of less than 2 rate hikes for 2016.

fed.hike.probabilities

Other Scientific, Health, Political, Economics and Business Items of Note - plus Miscellanea

  • Earth to Economics: Welcome to Science 101 (David Sloane Wilson, Evonomics)  This is a continution of the exchanges between this author, Noah Smith, Nick Hanauer and Eric Liu about the direction of a scientific approach to economics.  In this post Wilson defines an essence of the scientific method: hypothesis formulation.  He points out that hypothesis must be based on something and he suggests that would be some basic unifying theoretical framework.  He thinks "that a combination of evolutionary theory and complexity theory offers the best prospect for a unifying theoretical framework".  He suggests that a book based pn a conference last year scheduled to be published by MIT Press later this year offers similar thoughts ( “Complexity and Evolution: A New Synthesis for Economics”).  Econintersect:  We have suggested before that a useful avenue  at this early stage of development of a strong empiricism structure for economics research would be pursuit of deductive logic.  Much scientific research involves inductive reasoning whereby data is collected and analyzed to "prove" a hypothesis.  If the data disproves the hypothesis (more exactly stated, "fails to prove") the experiment is usually considered a failure.  This is exsmplified by the general tradition that a Ph.D. thesis is only acceptable if it proves the hypothesis (although this is sometimes "wiggled around" with a clever rephrasing of a hypothesis.  Considering all the grabage that has accummulated in the discipline, we suggest, at least for a while (until a new framework of proven reality is established) that economics research would be of value that would disprove the old "mythology" while still leaving undefined for the time being what might replace it. 

  • Stop Associating Adam Smith with Laissez-Faire Economics (Evonomics)  We will not summarize this short and very easily read in the form of 20 one and two sentence bullets.  It is a must read!

  • Reckoning With Inequality (Jeffrey Frankel, Social Europe)  JF has contributed to GEI.  Prof. Frankel says that it doesn’t really matter which measure of income distribution we choose: They all show the increase. And, while many competing explanations have been proposed, we do not need to agree about causes to concur on sensible policies to address the problem.  He then goes on to discuss the solutions, which largely focus on tax codes and fiscal policy.

  • What’s a Leveraged Buyout? Let Claire Danes Explain (Bloomberg)  A new Off Broadway play, "Dry Powder", a "gallows humor" performance which plays on "caricatures and stereotypes more than reality". But the play does tackles the industry's biggest perennial issue: whether buyouts benefit companies and the economy or are simply financial maneuvers executed at the expense of workers and others.  Econintersect:  For those uncertain what leraged buyout means, it is essentially a simple idea:  a takeover of a company with low debt by financing the purchase with large amounts of new debt added to the balance sheet by the buyers.  In an extreme case the buyers may put up little capital themselves and gain control of the company with the added debt almost exclusively.  What happens next is the topic of "Dry Powder":  The new owners may have a business plan for growing the company or they may simply strip off assets for sale, offshore production and monetize their acquisition as rapidly as possible.  


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