Targeting the Wealthy Kills Jobs | WSJ.com

T.J. Rodgers compares job creation through private investment to government investment.

Even European socialist democracies are starting to understand that tax-and-spend policies kill jobs. For example, both Italy and Spain have repealed their incentive programs for solar energy along with their “green jobs” because the countries have calculated that for every job created by government investment in green energy, somewhere between 4.8 jobs Italy and 2.2 jobs Spain are lost because of the reciprocal cuts in private investment.

Read more at T.J. Rodgers: Targeting the Wealthy Kills Jobs – WSJ.com.

Bloated business of banking | The Australian

Adam Creighton discusses the likelihood of taxpayers being asked to bail out too-big-to-fail banks.

In Australia that probability is now 100 per cent. Standard & Poor’s, a ratings agency, gives Australia’s biggest four banks a AA rating explicitly because taxpayers will provide “extraordinary support” to their creditors in any crisis, an implicit guarantee worth more than one-quarter of the four’s annual profits.

Since 1995, the big four Australian banks’ assets, reflecting a global trend, have ballooned from 94 per cent of Australia’s national income to $2.86 trillion, or 190 per cent.

Read more at Bloated business of banking | The Australian.

EconoMonitor | Japan’s Three Arrows―Will They Fly?

Jerry Schiff writes:

We see encouraging signs that the desired changes to the economy are beginning to take place. Growth in the first quarter rose by an impressive 4¼ percent seasonally adjusted annual rate. Equity markets are up by some 40 percent for the year. Exports appear to be recovering. Credit growth has turned positive. Consumer and business confidence have picked up. And Inflation expectations are beginning to rise…… But the transformation is far from complete. In particular, higher investment and wages — two keys for ultimate success — are not yet observed.

Read more at EconoMonitor : EconoMonitor » Japan’s Three Arrows―Will They Fly?.

Superannuation is inequitable and unsustainable | | MacroBusiness

I agree with Leith van Onselen that Australia’s aged pension/superannuation regime will be sorely tested over the next 30 years as the number of workers per retiree falls to below 2.5 to 1:

Workers per Retiree

But I don’t agree with his proposed solution:

…The flat 15% tax on superannuation contributions should also be axed in favour of a flat 15% concession. As illustrated above, under the current 15% flat tax arrangement, the amount of super concessions rises as one moves up the income tax scale, resulting in a system whereby higher income earners receive the most super tax benefit, despite being the very people that are the least likely to rely on the aged pension in retirement. A flat 15% concession, by comparison, would improve the equity and sustainability of the system by: 1) providing all taxpayers with the same taxation concession; 2) boosting lower income earners’ super savings and thus reducing reliance on the aged pension; and 3) reducing costs to the budget.

Argument that the flat tax on superannuation contributions is inequitable is based on the presumption that the present system of progressive tax rates is equitable. No doubt high income-earners benefit more from the flat tax than low income-earners, but the proposal ignores the fact that they pay more income tax in the first place. And even after the larger tax savings on their super contributions, the high income-earner will pay a significantly higher average tax rate.

Read more at Superannuation is inequitable and unsustainable | | MacroBusiness.

China ‘hard landing’ could trigger Australia recession: Standard & Poor – The Economic Times

“Australia’s exposure to commodity demand from Asia, and China in particular, was a saving grace during the global recession of 2009. But by the same token it has become Australia’s Achilles’ heel,” the ratings giant [Standard & Poor’s] said.

“Particularly while mining investment remains such a large share of the Australian economy, and other sectors continue to lack growth momentum, Australia remains highly sensitive to a sharp correction in China’s economic growth.”

Read more at China ‘hard landing’ could trigger Australia recession: Standard & Poor – The Economic Times.

The Magical World Where McDonald’s Pays $15 an Hour? It’s Australia | The Atlantic

Jordan Weissmann compares wages paid to McDonalds workers in Australia and the US, raising four interesting points.

Firstly, McDonalds (or “Maccas” if we use its colloquial name in Australia) is profitable in both low-wage and high-wage countries:

The land down under is, of course, not the only high-wage country in the world where McDonald’s does lucrative business. The company actually earns more revenue out of Europe than it does from the United States. France, with its roughly $12.00 hourly minimum, has more than 1,200 locations. Australia has about 900.

They achieve this partly through higher prices, but also through adjusting their staff structure in Australia.

The country allows lower pay for teenagers, and the labor deal McDonald’s struck with its employees currently pays 16-year-olds roughly US$8-an-hour, not altogether different from what they’d make in the states. In an email, Greg Bamber, a professor at Australia’s Monash University who has studied labor relations in the country’s fast food industry, told me that as a result, McDonald’s relies heavily on young workers in Australia. It’s a specific quirk of the country’s wage system. But it goes to show that even in generally high-pay countries, restaurants try to save on labor where they can.

They also focus on increased productivity.

It stands to reason that in places like Europe and Australia, managers have found ways to get more mileage out of their staff as well. Or if not, they’ve at least managed to replace a few of them with computers. As Michael Schaefer, an analyst with Euromonitor International, told me, fast food franchises in Europe have been some of the earliest adopters of touchscreen kiosks that let customers order without a cashier. As always, the peril of making employees more expensive is that machines become cheaper in comparison.

That is one of the primary dangers of high minimum wages: automation is used to improve employee productivity and shrink the required workforce. Shrinking the national wage bill might seem like good business sense, but if we look at this on a macro scale, reduced incomes lead to reduced consumption and falling sales.

Finally, McDonald’s have attempted to add value to their product range, moving slightly more up-market in order to capture higher prices.

McDonald’s has also helped its bottom line abroad by experimenting with higher margin menu items while trying to court more affluent customers. Way back in 1993, for instance, Australia became home to the first McCafe coffee shops, which sell highly profitable espresso drinks. During the last decade, meanwhile, the company gave its European restaurants a designer make-over and began offering more localized menus meant to draw a higher spending crowd.

If we take McDonald’s as a microcosm of the entire economy, the trade-offs and benefits (or lack thereof) are evident. Funding wage hikes out of increased prices (for the same quality products) is futile. It adds no benefit: the increased wage is eroded by higher prices. Reduced wages for younger workers simply disadvantages older workers, excluding them from certain jobs. Increased productivity — higher sales per employee — on the other hand, can benefit the entire economy.

Improved training or increased automation may increase output, but run the risk of shrinking the jobs pool — unless new jobs created in training or manufacturing are sufficient to offset this. Product innovation, on the other hand, is an immediate win, raising sales while encouraging job growth in new support industries.

How do we encourage product innovation? Higher minimum wages is not the answer. Nor, on its own, is increased investment in research and education. What is needed is a focus on international competitiveness: reducing red tape, ensuring basic goods and services such as electricity, water, shipping and transport are competitively priced, lowering taxes and stabilizing exchange rates. That would encourage the establishment of new industry locally rather than exporting skills and know-how to foreign shores. We need a culture of innovation and entrepreneurship, rather than lip-service from politicians.

Read more at The Magical World Where McDonald's Pays $15 an Hour? It's Australia – Jordan Weissmann – The Atlantic.

Henry Thornton | The recession we did not need to have

Henry Thornton expresses his opinion on the grim state of the Australian economy:

The Reserve Bank is widely expected to cut interest rates today. The economy is facing such a grim future that one can support such an outcome. But no-one, not even the Reserve Bank, is facing the main problem facing Australia, which is double-digit cost disequilibrium – a severe lack of international competitiveness.

Just like Treasury’s failure to be ahead of the curve in forecasting, the Reserve Bank’s apparent failure to understand our most important economic problem is bad news for all Australians….

Read more at Henry Thornton – The recession we did not need to have.

Hat tip to Houses & Holes at Macrobusiness.com.au.

China exports

Shipping rates for container vessels remain at depressed levels, close to the lows of 2009, according to the The Harper Petersen Index from ship brokers Harper Petersen & Co. This reflects the depressed level of global trade in manufactured goods. Major exporters like China are the most severely affected.

Harper Petersen Index

How urban Chinese workers helped cause the great recession | Quartz

Hillary Rosner describes how the inflow of savings from China contributed to the US sub-prime crisis:

“The foreign reserve holdings of U.S. Dollars,” the researchers write, “which had been at less than 11% of U.S. GDP prior to 2000, grew rapidly after 2002; in fact they almost doubled over the 5-year period from 2002 to 2007.”

Read more at How urban Chinese workers helped cause the great recession – Quartz.

EconoMonitor » Beijing’s New Leaders Are Right to Hold Back

Michael Pettis argues that China cannot stimulate its economy out of trouble:

There are still bulls out there who insist that China is out of the woods and making a strong recovery, for example former Deputy Governor of the Reserve Bank of Australia, Stephen Grenville, who argues in his article strangely titled China doomsayers run out of arguments:

“The missing element from the low growth narrative is that unemployment would rise, provoking a stimulatory policy response. China would extend the transition and put up with low-return investment recall that when unemployment was the issue, Keynes was prepared to put people to work digging holes and filling them in rather than have unemployment rise sharply. To be convincing, the low-growth scenario needs to explain why this policy response will not be effective.”

It seems to me that the reason why simply “provoking a stimulatory policy response” won’t help China has been explained many times, even recently by former China bulls. Of course more stimulus will indeed cause GDP growth to pick up, as Grenville notes, but it will do so by exacerbating the gap between the growth in debt and the growth in debt-servicing capacity. Because too much debt and a huge amount of overvalued assets is precisely the problem facing China, it is hard to believe that spending more borrowed money on increasing already excessive capacity can possibly be a useful resolution of slower Chinese growth.

Read more at EconoMonitor : EconoMonitor » Beijing’s New Leaders Are Right to Hold Back.