During Tuesday’s SolarCity earnings call, Elon Musk hopped in to let the world know what the company he co-founded plans to do next: create solar roofs. Not solar panels–entire roofs.
….”The point of all this was, and remains, accelerating the advent of sustainable energy,” Musk wrote in his recent Tesla “Master Plan Part Deux” blog post, “so that we can imagine far into the future and life is still good.”
Now, that plan is beginning to crystallize a bit more. Should Tesla close its $2.6 billion deal to buy SolarCity, it will bring Musk’s vision a little closer to reality–especially the part that entails creating cars that get their energy from solar-powered batteries.
A home that powers itself and perhaps the cars parked in its garage–and in the process, helps the world lessen its dependency on fossil fuels in a very big way–might not be that far off. And it might not look that bad, either.
Great column by Peggy Noonan in the Wall Street Journal on the growing detachment between political and cultural elites and the problems facing ordinary citizens on the lower rungs of society. There is plenty of evidence of out-of-touch elites, including Brexit and Angela Merkel’s unilateral decision to allow 800,000 migrants and refugees from Muslim countries.
Nothing in their lives will get worse. The challenge of integrating different cultures, negotiating daily tensions, dealing with crime and extremism and fearfulness on the street — that was put on those with comparatively little, whom I’ve called the unprotected. They were left to struggle, not gradually and over the years but suddenly and in an air of ongoing crisis that shows no signs of ending — because nobody cares about them enough to stop it.
The powerful show no particular sign of worrying about any of this. When the working and middle class pushed back in shocked indignation, the people on top called them “xenophobic,” “narrow-minded,” “racist.” The detached, who made the decisions and bore none of the costs, got to be called “humanist,” “compassionate,” and “hero of human rights.”
Surprising support for Donald Trump and Bernie Sanders also reflect the disillusionment of the bottom half with leadership by the 1 percent. They feel they have been taken for granted — if not shafted — and their anger will be reflected at the ballot box. Hopefully we can avoid the rise of tyranny as in the 1930s — after the last financial crisis — but these are dangerous times.
By William Dupor, Assistant Vice President and Economist
The most recent U.S. expansion, however lackluster, entered its eighth year in June.1 In anticipation of the possibility (or perhaps inevitability) of another recession, observers have remarked on how and whether countercyclical fiscal policy should be used to combat an economic downturn….
Gauging Effects through Military Spending
Research Analyst Rodrigo Guerrero and I took up the issue of the efficacy of government spending at increasing employment. We looked specifically at over 120 years of U.S. military spending, which provides a kind of “natural experiment” for our analysis.
Looking at government spending more generally suffers from the problem that the spending may be correlated with economic activity: The government may spend more during a recession (as with ARRA) or more during an expansion (when tax revenues are high). This might bias the results, which economists call “an endogeneity bias.”
Military spending, on the other hand, is likely to be determined primarily by international geopolitical factors rather than the nation’s business cycle.
….We used a similar methodology and found that military spending shocks had a small effect on civilian employment. Following a policy change that began when the unemployment rate was high, if government spending increased by 1 percent of GDP, then total employment increased by between 0 percent and 0.15 percent. Following a policy change that began when the unemployment rate was low, the effect on employment was even smaller.
In the event of another recession, policymakers have a number of stabilization tools at their disposal, including quantitative easing, negative interest rates and tax relief. The research discussed above suggests that one other device, namely countercyclical government spending, may not be very effective, even when the economy is slack.
I think the authors of this research come to the wrong conclusion. Instead they should have concluded that military spending is not very effective in creating jobs.
Military spending provides no lasting benefit to the economy in terms of tax revenue or saleable assets, leaving future taxpayers with public debt and no means of repayment. Other than an austerity budget which would risk another recession.
Whereas infrastructure projects can be selected on their ability to generate market-related returns on investment, providing revenue to service the public debt incurred…..and saleable assets that can be used to repay debt.
But there are two caveats.
First, project selection must not be a political decision. Else projects likely to win votes will be selected ahead of those that generate decent financial returns.
Second, the private sector must have skin in the game to ensure that #1 is adhered to. Also to reduce cost blowouts. Private companies are not immune to blowouts but government projects are in a league of their own.
The added benefit of infrastructure spending is the free lunch government gets from reduced unemployment benefits. Money they would have spent anyway is now put to a more productive use.
Tall shadows for the last three days on the spot gold chart suggest selling pressure. Penetration of the rising trendline indicates that the up-trend is slowing. Breach of short-term support at $1330/ounce would signal a test of medium-term support at $1300. Respect of support would confirm a healthy primary up-trend, while breach would indicate weakness.
At present I don’t see much threat to support between $1300 and $1310. Safe-haven demand for gold is boosted by uncertainty in Europe, the US election dilemma (a choice between two equally undesirable alternatives), and the declining Yuan.
USDCNY retraced to test support at 6.60. Sell-off of USD currency reserves by the PBOC — to support the Yuan or at least slow its decline — helps to suppress US Dollar appreciation. This is a win-win for gold bulls. A weak dollar enhances the price of gold while a falling Yuan encourages capital flight and — you guessed it — demand for gold.
Great insights from Allan H. Meltzer at the Hoover Institution:
Most of us learn at some point that politicians tell lies. We expect them to stop once they hold office or to face the consequences. In the past, politicians that violated the public trust resigned, most notably President Richard Nixon. Other lesser officials have also been punished for abusing public trust. No longer. In campaigns, and in office, politicians and their aides or supporters deliberately lie about matters of importance.
….The Obama administration lied to change a major foreign policy issue. Other lies are about less important but not unimportant issues. The French economist Thomas Piketty claimed that capitalism squeezes the middle and lower classes to favor the rich. Piketty’s book Capital in the Twenty-First Century and other studies that followed supported that argument by relying on deceptive data—specifically, income before taxes and transfers. Critics pointed out that the case is much weaker if income after taxes and transfers is used, as it should be. That’s much closer to the receipts that people have. And the differences are large. Transfers that are not part of income before taxes amount to more than $1 billion annually. The top 20 percent of taxpayers paid 84 percent of all income taxes in recent years. And the derided top 1 percent paid 23.5 percent of the income tax.The failure to use income after taxes and transfers cannot be accidental. It seems to be a deliberate attempt to mislead the public. And it is not the only misuse of data. Much of the recent large rise in the income received by the top 1 or 10 percent results from the Federal Reserve’s policy of lowering interest rates and raising housing and stock prices.
…..Hillary Clinton proclaims almost daily that women receive only 78 percent of the income that men receive. Her message is so misleading as to be dishonest. The 78 percent number is the ratio of women’s to men’s median pay. It does not adjust for occupational and other differences in the work that men and women do. For example, skilled neurosurgeons and football, baseball, and basketball stars are men. Domestic workers and hospital cleaning crews are mainly women. A recent paper by Diana Furchtgott-Roth summarized studies at Cornell and other quality economic departments. When adjustment for occupational differences are considered, the ratio is 92 or 94 percent, not the advertised 78 percent. And the remaining difference may not be due to discrimination. Differences in time in the work force, hours worked, and other factors may play a role.
….These are just a few examples of lies and misleading statements that we encounter every day. Clinton lies frequently and Trump shouts a falsehood a day—and probably more—as a major part of his campaign. This is not what citizens of a free country should expect and demand.
During the Federal Election campaign, Labor’s shadow treasurer, Chris Bowen, confirmed that the overall tax burden would hit 24.8% GDP by 2026-27 under Labor, up from 23.5% in 2019-20:
Mr Bowen told The Australian Financial Review that his number was lower than the 25.7 per cent of GDP that Treasurer Scott Morrison claimed Labor would deliver, but higher than the Coalition’s ceiling of 23.9 per cent.
Mr Bowen said the alternative would be spending cuts to essential services.
“Let me be clear: tax-to-GDP will be higher over the medium term under both the Coalition and Labor government. Either that, or the Coalition will continue to deliver more savage cuts to Medicare and education,” he said.
The admission was immediately seized upon by Treasurer Scott Morrison, who claimed that a higher tax burden would damage the Australian economy’s growth:
“Labor might want to think you can have a tax-to-GDP ratio approaching 26 per cent and that will have no impact on the Australian economy. They are kidding themselves…”
The Coalition’s 23.9% of GDP ceiling on tax is based on the National Commission of Audit’s recommendation that taxation revenue as a share of GDP should be capped at 24%.
The assumption that higher tax equals less economic growth is a popular one among conservatives, not just in Australia.
However, four American academics have published an important new book, entitled “How Big Should our Government Be?”, which examines in detail the vexed issue of government size and growth.
According to the Washington Post, which provides a good summary of the book, there is actually a positive correlation between the size of government and economic growth per capita:
Using data on 12 advanced economies from 1870, the authors of the book conclude with the following:
“In the century and a half since then, government expenditures as a share of GDP have risen sharply in these countries. Yet they didn’t experience a slowdown in their long-run economic growth rates. The fact that economic growth has been so stable over this lengthy period, despite huge increases in the size of government, suggests that government size probably has had little or no impact on growth.”
The authors also note that “A national instinct that small government is always better than large government is grounded not in facts but rather in ideology and politics,” and that the evidence “shows that more government can lead to greater security, enhanced opportunity and a fairer sharing of national wealth.”
In particularly, the authors call for more investment in infrastructure, education, as well as proper safety nets for the unemployed and those that get sick.
The Turnbull Government should take note as it considers taking an axe to Australia’s public services.
MY REBUTTAL:
Let me start by saying that I am not in favor of austerity as a response to a major economic slow-down. If anything that will exacerbate unemployment and prolong the contraction. Instead I advocate major infrastructure programs to stimulate the economy. But with two caveats: (1) investments must generate a market-related return on investment; and (2) there must be strong involvement from the private sector. Investment in assets that do not generate direct revenue leaves future taxpayers with a pile of debt and no income (or saleable assets) that can service (or repay) it. Involvement of the private sector should be structured to ensure that the benchmark of market-related returns is not superseded by projects selected to win the most votes. Also, the private sector should have skin in the game to restrict cost blowouts. They are not immune to cost blowouts but are not in the same league as big government.
I also believe that weak government will harm an economy. We need strong regulators, rule of law, police and military to ensure stability. Also spending on education and science to foster growth.
But the article by Jared Bernstein in the Washington Post typifies the kind of rubbish pedaled to voters around election time. And seems to have been swallowed hook-line-and-sinker by the author of the MB article.
Where do I start?
First, the fact that a book by four unnamed academics is cited as proof in itself should tell us how much credibility to attach to their claims.
Second, the author mentions that there is “a positive correlation between the size of government and economic growth per capita…”. A positive correlation is any correlation coefficient greater than zero. The highest correlation is a value of 1.0 which represents a perfect fit. No correlation coefficient is provided in either article and judging from the graph I would assume it is closer to zero than 1, meaning there is only a vague correlation. If you ignore the line drawn on graph, the data looks randomly scattered with no clear trend.
Also the author overlooks that he is only dealing with a sample of 12 countries, which again would give a low level of confidence in any result.
Further, in the WP article the author concedes that correlation is not equal to causation: “That positive slope in the figure on the left above could easily be a function of reverse causality: As economies grow, their citizens demand more from them.” This is omitted in the MB report.
Then the study of data for the 12 economies from 1870 up top the present is used to argue that growth in government expenditures does not hinder GDP growth. I would be surprised if the data didn’t show growth in government across all countries as it spans the era from horse-drawn carts up to the area of modern jets and space travel. From the country GP with a stethoscope to modern nuclear medicine and MRIs. From slate and chalk to super-computers and digital technology. Of course the demand for infrastructure has grown exponentially over that time. To argue otherwise would be stupid.
But that is not an argument in favor of a welfare state or increased government expenditure. In fact, most of those advances in technology were driven by private individuals and not by government.
Finally, I will use another graph from “How big should our government be,” Bakija et al in the same Washington Post article to argue the case for lean government (as opposed to small government circa 1870):
The graph shows that tax revenues as a percentage of GDP have steadily declined, since the late 1990s, for every country except France. Why has this occurred in even model welfare states like Sweden and, to a lesser extent, Canada? Simply because they reached “peak welfare” in the 1990s and realized that the only way to revive GDP growth was to reduce the role of government in the economy.
The only one who hasn’t accepted the evidence is France. Which may well be contributing to their poor economic performance.
The ASIC review of investments banks found that not only do the heavyweights of Australia’s financial system have difficulty in managing their conflicts of interest they also financially reward staff for potentially conflicted behaviour.
…..So ugly is the result the Australian Securities and Investments Commission has warned the people often known as the smartest men and women in the room it will take action against the culprits if the poor behaviour continues.
……Managing conflicts of interest are crucial for investment banks because often one part of the bank is advising on an asset sale or an initial public offering while the bank’s research arm is producing research for the investment banks’ investor clients about the quality of the assets or the IPO.
….ASIC said it had also found “instances of remuneration structures where research remuneration decisions, including discretionary bonuses, took into account research analyst involvement in marketing corporate transactions”.
The review also found “instances with mid-sized firms where research reports on a company were authored by the corporate advisory team that advised the company on a capital-raising transaction or had an ongoing corporate advisory mandate”.
Results of the review come as no surprise. When there is a conflict between profits with multi-million dollar bonuses and independence the outcome should be obvious.
Having worked in the industry, I believe that the only way to achieve independence is to separate investment banks from research houses, with no financial linkage. A professional body for research houses would ensure independence in much the same way as the auditing profession. There is no better way of enforcing good behavior than the threat of censure from a professional body that has the power to prevent its members from practicing.
JOHANNESBURG — The African National Congress, the party that helped liberate black South Africans from white-minority rule but has become mired in corruption, endured its worst election since taking power after the end of apartheid, according to results released on Friday….
For the opposition Democratic Alliance, the election results are the first significant victories outside of its stronghold in the western part of the country. Whites and South Africans of mixed race make up the party’s core supporters in that area, and blacks make up only about one-third of the population there.
The Democratic Alliance retained Cape Town, the nation’s second-biggest city, with a landslide victory. The party now controls at least two of the nation’s eight biggest cities.
Mmusi Maimane, who last year became the Democratic Alliance’s first black leader, claimed victory in the mayoral race in Pretoria on Friday, with more than 10 percent of the votes still left to be tallied. The A.N.C. did not concede.
Under Mr. Maimane, 36, who grew up in Soweto, the Democratic Alliance appears to have made inroads even in A.N.C. strongholds, especially among young voters whose image of the A.N.C. has less to do with Mr. Mandela than with Mr. Zuma.
“I wanted change,” said Tebogo Malatjie, an unemployed 22-year-old man in Soweto who voted for the first time for the Democratic Alliance. “You cannot vote for the A.N.C. if you want change.”
Apart from the charismatic Nelson Mandela, who made a major contribution in uniting the various tribes and cultures in South Africa, the ANC has proved itself incapable of governing a first-world economy. Mired in corruption and with rampant crime, the country has stumbled from one economic disaster to the next. The former guerilla army has proved incapable of adapting to the task of responsible government.
Nothing depicts the plight of the South African economy better than the demise of the Rand against the US Dollar (USDZAR plotted below with inverted semi-log scale):
The Democratic Alliance has used its traditional stronghold of the Western Cape to showcase the benefits of clean, stable government. A message that is now winning votes in Traditional ANC areas like Nelson Mandela Bay (formerly Port Elizabeth).
A Democratic Alliance win in the national elections, in 3 years time, is the best chance of restoring the country to its former status as the economic powerhouse of Africa.
Long-term interest rates surged on strong jobs numbers, well above the estimate of 180,000. From the WSJ:
Nonfarm payrolls rose by a seasonally adjusted 255,000 last month, the Labor Department said Friday. Revisions showed U.S. employers added 18,000 more jobs in May and June than previously estimated.
10-Year Treasury yields strengthened to 1.58 percent in response, from a record low of 1.33 percent four weeks ago. Expect a test of the descending trendline at 1.66 percent.
Gold fell to $1335/ounce on expectations of higher interest rates. Penetration of the rising trendline would suggest a correction to test primary support at $1200/ounce. Follow-through below $1300 would confirm.
At present I don’t see much threat to support between $1300 and $1310. Especially with safe-haven demand for gold enhanced by European uncertainty over Brexit, the dilemma of US November elections (a choice between two equally undesirable alternatives), and a declining Yuan encouraging capital flight from China.
Light Crude (September contract) is testing medium-term support at $40/barrel. Breach of support would signal a test of primary support at $33 to $34. Respect of support, on the other hand, would indicate another test of resistance at $50. And breakout above $50 would signal a primary up-trend.
