“U.S. economy likely shrank in quarter one, but fundamentals strong”

The quote is from Reuters which maintains the delusion that all is well with the American economy. As with the data on unemployment, there are people across the American Government, throughout the public service and at every level of the left media whose job it is to pretend all is well so long as Democrats are in charge. If the White House changes hands in 2017, we will hear a different story. But until then, the good times will continue to be around the corner, as they have been for the past six years.

But some things you cannot hide, which is that U.S. economy contracted in the first quarter. The national accounts are, unfortunately, a truly inadequate measure of what you would like to know. If one economy grew by 10% and another by 2%, which one has a higher standard of living? The fact that you cannot tell is one of the signs that the number really doesn’t get to what is actually of interest. And here is a question that is less easy to answer than you think it ought to be. If an economy grew by 10%, just what exactly is 10% bigger this year than it was last year? Again a difficult question that few are ever taught. But it is not what you really want to know if you are interested in prosperity and jobs.

Almost all of our economic measures are incompetent if the aim is to understand present economic conditions and current trends. But there is no disguising this one. A contraction in economic activity is not part of the story of an economy in recovery.

Posted in Economics and economy, International | 1 Comment

Open Forum: May 30, 2015

Posted in Open Forum | 43 Comments

Unemployment in the US

The official unemployment data are notorious for their ability to hide, mislead and distort. The media are notorious for exactly the same thing. This is an article about the actual depth of the unemployment problem in the US at this very moment.

The national unemployment rate ticked down slightly to 5.4 percent in April — a rate not seen since May 2008 — the U.S. Bureau of Labor Statistics recently reported. Although this is welcome news, government statistics mask economic troubles that continue to plague millions of Americans years after the end of the last recession. For starters, the widely-reported “U-3” unemployment rate only includes those who are actively seeking employment. And more and more job-seekers are getting discouraged and giving up the job search altogether. This is why the unemployment rate has declined even as the civilian labor force participation rate has dropped significantly from its peak of 67.3 percent in 2000 to 62.8 percent today — hovering near a 37-year low.

The broader U-6 measure of unemployment, which includes those who want to work but have gotten so discouraged by their unsuccessful job search that they have given up, and those who want to work full-time but have had to settle for part-time work, remains double the U-3 rate, at 10.8 percent. But even this does not provide the full unemployment picture. In 1994, the BLS stopped including long-term discouraged workers, who have been unemployed for more than a year, in its statistics. Reinserting this group would yield an unemployment rate of 23 percent, according to John Williams of ShadowStats.com. A Harris Poll reveals the depths of would-be workers’ despair, finding that fully 40 percent of those unemployed have given up looking for work.

For more than six years, increased government spending and the Federal Reserve’s quantitative easing and zero interest-rate policies have failed to restore prosperity, succeeding only in fostering more debt, reinflating the equity and housing bubbles for the next crash and destroying any incentives to save or eliminate malinvestments. Until these monetary and fiscal policies are reversed, expect more boom-and-bust business cycles, more erosion of lower- and middle-class wealth and more massaged government statistics. [My bolding]

This is seriously a worry. I used to adjust our own unemployment rate for shifts in the participation rate and still look at the number. But we have a bit of a slide but never more than a percentage point. In the US it has fallen by almost five percentage points. That is a large number of people to go missing. But 23% on the old way of calculating the number is astonishing if there is no double counting involved which there may be. But it is much more than 10%.

You really do have to wonder how innumerate the opposition parties are, or even if they are interested in also hiding the reality rather than confronting a problem that may be unfixable, given the nature of politics at the moment. If it really around 20%, it is as bad as it was in the middle of the Great Depression.

Posted in American politics, Economics and economy, Media | 26 Comments

It’s not my fault, says Bernanke

Well, actually, yes it is. The economic establishment is floundering, trying to work out what went wrong. They are, I’m afraid, clueless in their Keynesian beliefs. This is from The Oz: Ben Bernanke: ‘Lack of stimulus to blame for rates’. But before we turn further to Dr Bernanke, let me just draw your attention to a recent article about the success of the “austerity” program in the UK, written by Niall Ferguson:

Long before the United Kingdom’s recent general election, which the Conservatives won by a margin that stunned their critics, the facts about the country’s economic performance had indeed changed. Yet there is no sign of today’s Keynesians changing their minds.

With these thoughts in mind, let us turn to the views of the previous Chairman of the Fed.

The most influential central banker in a generation, who guided the global economy through the biggest financial crisis since the Great Depression, has pinned the blame on governments for the ultra-low interest rates that are playing havoc with exchange rates, asset prices and incomes around the world.

In sweeping and optimistic ­remarks about the economy, made in Sydney yesterday, former US Federal Reserve chairman Ben Bernanke said central banks had been compelled to slash interest rate to unprecedented low levels because governments had dragged their feet in providing essenti­al stimulus measures.

This is all after-the-fact. Now that they are actually witnessing the wreckage that has befallen the world’s economies, and in particular the United States, they are looking for reasons why their policies didn’t bring the recovery they said it would. Bernanke, like Krugman, are mystified. They really have no idea why things have unfolded as they have. Bernanke who made such a fetish of having done so much scholarly work on the Great Depression to work out what to do this time round, finds that whatever he thought he knew, whatever it was he did, that the sum total of their efforts have been a disaster.

I have been teaching the devastating consequences of low interest rates since the start of the GFC. All in the second edition if you are interested. But any economist who believes that an economy can be resurrected from the demand side is a danger to any economy they provide advice to. So here is Bernanke’s latest prediction:

“Some slowing in China is both inevitable and probably ­desirable … (but) a hard landing is not a high probability at all,” he said

Given his track record, if that doesn’t make you worry, I don’t know what would.

Posted in Economics and economy | 39 Comments

EU ambassadors advise Australia on how to run a successful economy

No, the ambassadors’ advice was not “steer way from the policies we have put in place which have resulted in zero growth for the past six years, the bankruptcy of Greece, endless budget deficits and deindustrialisation”.  Instead the emissaries of economies that are ‘interesting places to visit’ want us to adopt those same policies.

Yes, the 26 ambassadors from the EU have clubbed together to write a piece, Europe calls for climate action,  that the AFR published earlier this week.  In it they rehash the need for Australia to follow Europe in taking climate action, drawing support from CSIRO reports that the seas are arising and the air is aheating. In drawing upon this material, they close their eyes to the absence of any warming or abrupt changes in weather over the past seventeen years when the global warming theory should have had Gaia raining frogs on us.

Pricelessly, the EU’s dignatories smugly claim that the creaking economies of Europe are testimony to the notion that it is “possible to combine economic growth with greenhouse gas reductions”.  The abrupt collapse of these economies and their failure to grow in the years since 2008 is presumably just coincidental to the policies its governments have visited upon their people.

All this propaganda and expense dedicated to repositioning economies in ways that politicians and officials can exercise control will be ramped up in the six months leading to the Paris Conference on global warming policies in December of this year.

There will be no agreement on meaningful emission reductions – the emerging superpowers, China and India, will see to that.  But we will see increased pressure to hamper economic wellbeing by regulatory policies and taxes on energy.  And the EU, which has institutionalised such pressures more effectively than other countries, will implement more of them and, in order to salvage some competitiveness,  become increasingly desperate to force others along the same path.

I have a more lengthy piece on the matter in Quadrant on line.

Posted in Uncategorized | 27 Comments

“Science has taken a turn towards darkness”

These are quotes from the editor of The Lancet, the premier medical journal in the world, reported by Steve Hayward at Powerline. My link is through Hayward’s post, but any of us who have dealt with global vermin will know what he means. And that is not where it stops.

“A lot of what is published is incorrect.” I’m not allowed to say who made this remark because we were asked to observe Chatham House rules. We were also asked not to take photographs of slides. Those who worked for government agencies pleaded that their comments especially remain unquoted . . . this symposium—on the reproducibility and reliability of biomedical research, held at the Wellcome Trust in London last week—touched on one of the most sensitive issues in science today: the idea that something has gone fundamentally wrong with one of our greatest human creations.

The case against science is straightforward: much of the scientific literature, perhaps half, may simply be untrue. Afflicted by studies with small sample sizes, tiny effects, invalid exploratory analyses, and flagrant conflicts of interest, together with an obsession for pursuing fashionable trends of dubious importance, science has taken a turn towards darkness. . .

The apparent endemicity of bad research behaviour is alarming. In their quest for telling a compelling story, scientists too often sculpt data to fit their preferred theory of the world. Or they retrofit hypotheses to fit their data. Journal editors deserve their fair share of criticism too. We aid and abet the worst behaviours. Our acquiescence to the impact factor fuels an unhealthy competition to win a place in a select few journals. Our love of “significance” pollutes the literature with many a statistical fairy-tale. We reject important confirmations. Journals are not the only miscreants. Universities are in a perpetual struggle for money and talent, endpoints that foster reductive metrics, such as high-impact publication. . . nobody is ready to take the first step to clean up the system. [Emphasis added.]

Scientific research in some areas has become like the media. There are only certain conclusions you are allowed to reach and if you want that next grant, or that next publication, you had better make sure you are well within the acceptable range of opinion.

And here is the direct link to the editor of The Lancet where you can read his comments in full.

Posted in Cultural Issues, Ethics and morality | 41 Comments

Talking of rubbish

I think the Fairfax editors must be permanently out to lunch when such complete rubbish is published.  (And those industry super funds must have such fun briefing eager young journalists in their campaign against self-managed superannuation)

But just pick the holes in the following.  Hint:

  • Dividend imputation applies to all Australian residents shareholders and to all types of superannuation funds;
  • The members of SMSFs are more likely to be older and retired; the same tax rules apply to all

Here’s the piece in question – at least it was not put on page one as has been the case.  Perhaps the editors got back from lunch just in time.  Of course, when she starts quoting the research arm of the Greens, The Australia Institute, you know to stop reading.

And by the way, the tax concessions are actually very well targeted because it is only the better off who will be totally self-reliant in retirement (around 20  per cent) and not draw the age pension, in full or part.  The public policy case is to direct the concessions to this group rather than allow the others to effectively double dip.

The cost to the budget of giving tax breaks to self-managed super funds has continued to soar, putting fresh pressure on the Abbott government to reconsider its refusal to examine generous incentives for wealthy retirees.

Australian Taxation Office data, analysed by Fairfax Media, shows 300,000 self-managed superannuation funds (SMSFs) legally eliminated or reduced their tax bills in 2012-13, the most recent year for which data is available.

I know 65-year-olds think they are special and deserve a free run through the tax system … but they have no argument on principle, it’s an argument based on selfishness.

John DaleyBut while the number of funds claiming tax breaks has remained virtually the same, the dollar value of tax breaks is increasing, thereby reducing government revenue.

The two major tax breaks offered to about half a million SMSFs come through franking credits – which allow the funds to avoid paying tax on the dividends they get from listed companies – and exemptions for taxpayers whose super funds are funding their pension income.

The combination of the two tax breaks allows some wealthy retirees to reduce their tax bills to zero.

Climbing concessions

The ATO statistics show the dollar value of franking credits rose to $2.68 billion, an 8.2 per cent jump compared to the previous year.

In addition, there were almost 450,000 funds that generated gross taxable income of $25.8 billion. About $16.8 billion of that was entirely exempt from income tax because the funds were in the pension phase, which doesn’t incur income tax. This is a 10.6 per cent rise from the previous year.

The head of the government’s own financial systems inquiry, ex-Commonwealth Bank chief executive David Murray, has repeatedly said that superannuation concessions are inequitable and should be examined in the tax white paper.

Mr Murray has also noted in his report to government that there’s less justification for the dividend imputation system (which allows franking credits to be dished out) than in the past.

Franking credits are granted to shareholders because the company in which they own a share has already paid its tax liabilities, based on the 30 per cent corporate tax rate. That rate is often less than the top personal marginal tax rate.

Bigger funds

While larger funds are also entitled to the exact same tax breaks, 99 per cent of all Australian super funds are SMSFs and they hold 30 per cent of the $1.9 trillion of total super industry assets. There are currently one million SMSF members.

Treasurer Joe Hockey’s tax white paper launched earlier this year, asked the question: “How appropriate are the tax arrangements for superannuation in terms of their fairness and complexity? How could they be improved?”

But Mr Hockey and Prime Minister Tony Abbott have ruled out making any changes to superannuation in their first term.

Shadow treasurer Chris Bowen said the current system of super tax concessions was “unsustainable and unfair”.

“In four years time the cost to the federal budget of super tax concessions will outstrip the cost of the age pension,” Mr Bowen said.

Wealthy benefit

The Australia Institute’s modelling on superannuation tax concessions shows that the benefits of super tax concessions are mainly accruing to the top 10 per cent of households, who claim 41 per cent of the tax concessions, worth $12.2 billion.

The institute’s executive director Richard Denniss said the government needs to reconsider its position.

“The only reason that these loopholes in the tax system exist is that average Australians who never will use them, have no understanding of how lucrative they are,” Mr Denniss said.

“The whole system is a mess – it’s neither simple nor fair. And increasingly, it doesn’t collect much revenue for us.”

Australia and New Zealand are now the only two developed countries that have full imputation of dividends. ”This should be stopped tomorrow,” Mr Denniss said. “And income from superannuation should be taxed at your full marginal rate.”

‘Poorly targeted’

Grattan Institute chief executive John Daley said the super tax breaks were “poorly targeted concessions that most provide benefits to those who need them least”. He said given Mr Murray and treasury secretary John Fraser have both cited merits in looking at superannuation tax concessions, the government should now use the tax white paper as an opportunity to do so.

Mr Daley said it would be better to tax the earnings of superannuation funds in pension phase at 15 per cent, rather than try to get rid of franking credits.

“There’s no reason you should pay no tax once you’re in pension phase,” Mr Daley said. ”Contrary to what the Liberal Party say, we would not be taxing peoples’ money. We’d be taxing the earnings on it. I know 65-year-olds think they are special and deserve a free run through the tax system … but they have no argument on principle; it’s an argument based on selfishness.” Continue reading

Posted in Uncategorized | 54 Comments

Scott of the Aunt Arctic

Aunt Arctic in the sense of the kind of welcome given to conservatives at the ABC. It seems that it has come to the attention of the MD of the ABC that there are people in the community who believe that Q&A has a bias towards the left. According to the story, therefore, ABC: Mark Scott to review Q&A amid left-bias claims. He must be worried that not even Malcolm will be able to get him that one-year extension to his contract as they look for a replacement. But for sheer obtuseness, it is hard to beat this:

Asked by Coalition senator James McGrath why Monday-night panel show Q&A consistently leans to the Left, Mr Scott said it was not the first time he had heard that “depiction” and agreed to conduct a survey or “sampling” of the topics discussed.

Mark, it’s not just Q&A and it’s not just the topics discussed. I wonder if he has ever heard that depiction about the whole of the ABC, although given the circles he seems to travel in, possibly not.

Posted in Hypocrisy of progressives, Media | 31 Comments

Treasury: on the one hand and on the other

I have long suspected that being assigned to work on the Tax Expenditure Statement in Treasury is the equivalent of the shipping news.

In the past, no one seems to have taken much notice of the work and the unsupervised staff have taken it upon themselves to run riot, ideologically at least.

As we have noted before, the main theme of the TES is that all income and capital gains belong to the government and anything that is returned to individuals or other entities should be regarded as concessions – to be reeled in when it takes the government’s fancy (prodded on by ‘empirical’ and wise advice of Treasury).

What sane person classifies the capital gains tax exemption of the main residence as a tax expenditure and adds in the ‘discount’on the CGT for good measure?  Voila there is nearly $50 billion lying on the pavement.

What this shipping newster is saying is that all nominal capital gains on the main residence should be taxed at marginal income tax rates?  Is this for real?

But something that the shrill commentators on superannuation tax (we need to remove the concessions brigade) don’t seem to have picked up is the profound inconsistency in the treatment of superannuation taxes in the Budget compared with the TES.

At MYEFO, it was expected that $7,040 million would be raised by way of superannuation fund taxes in 2014-15.  By the time the Budget came around, this figure was $6,140 million – or nearly 13 per cent lower.

It turns out the receipts from superannuation funds are expected to grow by 0.6 per cent in 2014-15.  (There is a change in monthly pay-as-you-go instalments in 2015-16 which will artificially lift revenues for that one year.)

Over the four years ending in 2017-18, superannuation fund taxes are expected to be $1.8 billion lower than MYEFO, mainly due to low wage growth,  It is also noted that “the downward revision to superannuation fund receipts in 2014-15 primarily reflects lower-than-expected collections attributable to higher-than-expected foreign exchange losses in 2013-14.” (In other words, Treasury has no frigging idea.)

All this information seems to have escaped the kids in the basement working on the TES. Check out the revenue foregone tax expenditure estimates for the concession taxation of superannuation entity earnings:

2015-16      $16.15 billion

2016-17      $21.6 billion

2017-18     $26.8 billion

2018-19     $30.4 billion

In other words, tax expenditure on superannuation earnings is expected to increase by 88 per cent in this four year period ending 2018-19.  Is this some sort of joke?  This implies compound annual returns of around 15 per cent per year.

And this is in the context of Treasury consistently overestimating actually superannuation taxes in the budget proper.

Here’s my challenge to the Treasury: release all the workings, model assumption and data behind the TES calculations so they can be replicated (or disproved).  This is real black box stuff and, given the misuse to which the TES is put, this is the very least we can expect from the new management on the block.

So next time you read that the tax expenditures on superannuation are to top $50 billion (quoted nearly every day in Fairfax and ABC) – even though Treasury warns us not to add the figures – realise that these estimates are complete BS.

(I have made this point before but to repeat: the TES on superannuation fund earnings uses 100 per cent of contributions even though they are taxed at 15 per cent tax, save for high income earners (30 per cent).  This is just a blatant error.  The TES should only apply to 85 per cent of earnings, assuming you believe in the methodology.)

Posted in Uncategorized | 11 Comments

War games

David Archibald has been saying this for as long as I can remember. This is from a year ago:

China has built an offshore oil drilling rig, numbered HD-981, specifically for the purpose invalidating other nations’ claims to seabed they thought was theirs. There is no doubt about the purpose of the rig given that a Chinese state oil company official once called it “our mobile national territory.” Its primary purpose isn’t commercial. If China can drill an oil well on some other country’s seabed, they can then claim that it was China’s territory all along. The rig is having its first outing to that purpose off the coast of Vietnam, accompanied by 86 Chinese vessels including a submarine. Vietnam responded by sending 30 coastguard vessels to interfere with the Chinese drilling rig. Ramming of Vietnamese vessels by the Chinese ones has been reported.

Miscalculation might not lead to war because there is nothing miscalculated about what China is doing. China intends to start a war.

As far as Archibald was concerned, this war was inevitable. Then yesterday, we had this at Drudge from The Telegraph in London, US-China war ‘inevitable’ unless Washington drops demands over South China Sea. This is how the story starts:

China has vowed to step up its presence in the South China Sea in a provocative new military white paper, amid warnings that a US-China war is “inevitable” unless Washington drops its objections to Beijing’s activities.

And we are right in the thick of it. From The AFR again yesterday, China using Brazil resources as lever against Australia:

China will use its growing relationship with Brazil to pressure Australia into running a more independent foreign policy, according to analysts and academics, as Beijing seeks to use its economic muscle for strategic influence.

Chinese Premier Li Keqiang signed $US50 billion ($63.5 billion) worth of deals during a state visit to Brazil last week, including a loan facility to help iron ore miner Vale increase production.

In a sign that Beijing is increasingly looking towards Brazil for food and mineral commodities, China also pledged to lift a ban on Brazilian beef.

“If Australia gets closer to the United States we will see China increase its purchases from Brazil, while reducing its trade with Australia,” said Wu Xinbo, Dean of the Institute of International Studies at Fudan University.

“The alliance between Australia and the US is a major constraint on the relationship between China and Australia.”

And now today, picked up at Drudge: Japan to join U.S., Australia war games amid growing China tensions.

Japan will join a major U.S.-Australian military exercise for the first time in a sign of growing security links between the three countries as tensions fester over China’s island building in the South China Sea.

While only 40 Japanese officers and soldiers will take part in drills involving 30,000 U.S. and Australian troops in early July, experts said the move showed how Washington wanted to foster cooperation among its security allies in Asia.

It’s a very messy world out there. I hope someone is paying attention.

Posted in International | 75 Comments