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Tuesday, March 13, 2018

Claim Dutch East India Co most valuable company in history is real fake news

This statue of Jan Pieterszoon Coen (1587-1629), the VOC governor general for Asia, was erected in his native Dutch town of Hoorn in 1893. In 1621 Coen had organised the genocide of about 14,000 inhabitants of the Banda Islands, a group of small volcanic islands within the archipelago known as the Spice Islands in Eastern Indonesia. Nutmeg was native to the Banda Islands. Image source: Wikimedia Commons

In 1602 the States-General of the Dutch Republic chartered the Vereenigde Oost-Indische Compagnie (VOC) — United East India Company in English, but commonly known as the Dutch East India Company — with a monopoly of trade with Asia. In 2012 it was claimed to be the most valuable company in history and in December 2017 multiple media outlets including Dutch ones, reported on a current day valuation of $7.9 trillion, equivalent to a market value of 20 global corporations, headed by Apple Inc.

The claim is real fake news as it is not based on evidence from the extensive surviving VOC documentation. The company was dissolved in 1799.

This week researchers reported that false stories spread significantly more on Twitter than did true ones (see here and here). This isn’t exactly a new phenomenon and Jonathan Swift, the Irish writer, wrote in 1710:

“Besides, as the vilest Writer has his Readers, so the greatest Liar has his Believers; and it often happens, that if a Lie be believ’d only for an Hour, it has done its Work, and there is no farther occasion for it. Falsehood flies, and the Truth comes limping after it; so that when Men come to be undeceiv’d, it is too late; the Jest is over, and the Tale has had its Effect…”

The Dutch East India Company (VOC) is regarded as the first modern multinational as by the renewal of its charter in 1623, its shares were not only traded on stock exchanges but it had a permanent capital while directors and shareholders had limited liability.

Following Apple’s milestone in 2012 in becoming the most valuable listed company, the false claims on VOC’s value began when Motley Fool, the US financial website, posted a report on the most valuable companies in history.

Last December a Canadian company Visual Capitalist of Vancouver, which produces digital media content for investors produced an infographic and content on ‘The Most Valuable Companies of All-Time.’

The company said: “Widely considered the world’s first financial bubble, the history of Tulip Mania is a fantastic story in itself. During this frothy time, the Dutch East India Company was worth ƒ78m Dutch guilders, which translates to a whopping $7.9 trillion in modern dollars.”

This gives a 1637 guilder conversion rate of about 100,000 to the current US dollar!!

There was no Tulip Mania in 1637 — a small group were involved in speculation on rare tulip bulbs and the contracts between speculators were declared legally invalid;

The value of f78 million Dutch guilders is false. The true market capitalisation of ƒ19.3m in 1637 converts to ƒ489.75m or €222.24m in 2016 according to Dutch inflation data from 1450 provided by the Royal Netherlands Academy of Arts and Sciences (KNAW) — see the first article linked to below.

The issued capital of VOC was ƒ6,429,588 (remained fixed from 1602 to 1799) and in 1720, the peak year of the South Sea Company Bubble in London and the Compagnie du Mississippi/ Compagnie d’Occident Bubble in Paris (both companies were chartered to privatise the sovereign debt of Britain and France), VOC shares hit an all-time peak of over 1,200% of the IPO price.

If the market capitalisation of VOC of ƒ78 million related to 1720, the euro value would be €805 million or $807 million in 2016.

By 1721, the VOC share price was down about 50% from its peak.

The share price of the British East India Company (EIC) had an all-time peak of £420 in 1720 and was down to £150 in the summer of 1721.

The Golden Age for the VOC was the first half of the 17th century and for the EIC the second half of the 18th century when it ruled a big chunk of India and according to records, its standing army in 1803 was 233,000 men — greater than the British Army.

The EIC was the most powerful company in history.

It’s not clear where the 2012 value of $7.4 trillion came from and Jeff Desjardins, the founder and editor of Visual Capitalist, just updated that figure with 2013-2017 inflation.

Repeat something often enough and it can become a fact because it’s too much hassle to check the evidence.

The Dutch were better at keeping records and that’s why the EIC isn’t among the most valuable companies. Besides, how would its role as the world’s greatest illicit drugs cartel be quantified?

Karl Marx who had coined the term “religion is the opium of the people” in 1843, wrote in 1858 that the British Empire was “preaching free trade in poison”, and by the start of the 20th century China with a population of 400 million was in the grip of an opium addiction disaster on a scale that had never been seen before or since, in the history of humanity.

In summary, comparing values of modern listed companies with two of the first listed companies is ridiculous but it generates headlines.

The number of shareholders of the VOC and EIC was small while funding via bonds and loans was more important than equity. The VOC left debt outstanding of about ƒ120 million on its collapse and it was added to the Dutch national debt.

The EIC during its history either bailed-out the British government or the reverse.

Check here also:

First Modern Economy: Myths on tulips & most valuable firm in history

Measuring Worth Is a Complicated Question

Motley Fool, Zero Hedge, Business Insider, Visual Capitalist and the many other recyclers of this fake news, should delete their posts.

Sunday, December 17, 2017

Brexit, stagnant earnings and globalization

The British vote to leave the European Union was motivated by several factors and in nearly two-thirds of the seats held by the Labour Party (and in no less than four-fifths of those located in the North of England and the Midlands) a majority of voters voted to leave the EU − but across Britain as a whole, 63% of those who voted Labour in 2015 and who cast a ballot in the EU referendum, voted to Remain.

The Economist was more specific on how immigration impacted the vote: "Where foreign-born populations increased by more than 200% between 2001 and 2014, a Leave vote followed in 94% of cases. The proportion of migrants may be relatively low in Leave strongholds such as Boston, in Lincolnshire (where 15.4% of the population are foreign-born). But it has grown precipitously in a short period of time (by 479%, in Boston’s case). High levels of immigration don’t seem to bother Britons; high rates of change do." 

Last December, Mark Carney, governor of the Bank of England, recalled in a speech in Liverpool when “it was in the midst of a golden age; its Custom House was the national Exchequer’s biggest source of revenue. And Karl Marx was scribbling in the British Library, warning of a spectre haunting Europe, the spectre of communism. We meet today during the first lost decade since the 1860s.”

Last month the Institute of Fiscal Studies, Britain’s leading financial think-tank, said that in 2008, the median worker in the UK (i.e. the person for whom half of workers earn more and half earn less) working full time had an annual salary of £24,500 in today’s prices. Today, a decade later, the median worker working full-time earns £23,000, still £1,500 below the pre-crisis level.

“A decade without the nation’s workforce getting a pay rise is extremely disappointing, but the forecasts now imply that sluggish increases could be the new normal. Real wages are due to be flat next year, and even in 2022–23 average earnings are due to be below where they were in 2007–08. That implies a lost decade and a half of wage growth, an unprecedented period of stagnant earnings in the UK.”

OECD data on average earnings for a full-time or full-time equivalent employee, show that among rich countries, the UK, Italy, Greece and Iceland had lower levels in 2016 compared with 2007.

Mark Carney spoke of “the disconnect between economists and workers. The former have not been sufficiently upfront about the distributional consequences of rapid changes in technology and globalisation. Amongst economists, a belief in free trade is totemic. But, while trade makes countries better off, it does not raise all boats; in the clinical words of the economist, trade is not Pareto optimal. Rather, the benefits from trade are unequally spread across individuals and time. Consumers get lower prices and new product varieties, and, overtime, benefit from the spur to innovate and higher productivity. Some workers, however, lose their jobs and the dignity of work, or see their ‘factor prices’ – in plain English, wages – equalised downwards.”

What is good for London may not be for a depressed region in the North of England. The cost of housing in the capital city does not promote mobility. 

People who work in areas of the US most affected by imports typically have greater unemployment and reduced income for the rest of their lives, according to research led by David Autor, a professor at the Massachusetts Institute of Technology (MIT). However, overtime automation has had a far bigger effect than globalization and would have eventually eliminated those jobs anyway.

“Some of it is globalization, but a lot of it is we require many fewer workers to do the same amount of work,” he said. “Workers are basically supervisors of machines.”

Sunday, October 29, 2017

More than half Irish indigenous exports go to 4 Anglo-Saxon countries

Ryanair’s annual revenues in the 12 months to March 2017 were at €6.65bn. According to Enterprise Ireland indigenous tradeable exports in 2016 to Europe-excluding UK, Africa, Middle East, Russia, Central Asia and India, were valued at €6.95bn. UK exports were at €7.75bn and to US/Canada were at €3.74bn.

In 1973 when we joined the EEC about 55% of total exports went to the UK. Today the same ratio of indigenous exports go to 4 Anglo-Saxon countries: UK, US, Canada and Australia.

Even though there are more direct jobs in indigenous exporting firms, 201,100 at end 2016, compared with 199,900 in IDA Ireland foreign-owned (FDI: foreign direct investment) exporting client firms, it’s striking that the onset of Brexit has not focused attention on the narrow base of indigenous firms.

The main attention of policymakers has been on getting ready-made jobs from US firms and these firms are also the target of the big Irish professional firms.

Both the FDI and indigenous sectors are not engaged in significant innovation.

Ireland’s individual material standard of living is similar to Italy’s while in contrast, Denmark is a high-wage knowledge economy.

See more here on indigenous trade; the small number of exporting firms; lack of language skills etc. and how Denmark, which in the 1950s was also highly dependent on agricultural exports, evolved to be a high-wage knowledge economy:

Irish Exports: Eurozone top market but poor for local firms

Thursday, October 26, 2017

Irish myth of ultra-low French effective corporate tax rate

Source: US Congressional Budget Office
Click image for bigger size 

Since the Irish international economic rescue year of 2010 when Nicolas Sarkozy, then French president, suggested that the low Irish headline corporate tax rate of 12.5% should be raised, it has been commonly believed in Ireland that the French were hypocrites because they had even a lower effective rate than Ireland's, based on actual tax paid as a ratio of reported taxable income.

The 'Paying Taxes' annual report that is produced by PwC, the Big 4 accounting firm, for the World Bank, showed in that year that France had an 8.2% effective rate compared with Ireland's 11.9%.

Both these rates were misleading.

The 2016 national average effective rates of corporate taxes of 0.4% for France and 12.4% for Ireland, cited in the September 2017 Comptroller and Auditor General (C&AG) of Ireland's report, do not reflect the reality for multinational firms. The claims made are very misleading and the French data are false.

In March 2017 six months before the C&AG's report on corporate taxes, the Congressional Budget Office (CBO) of the United States issued a report on research it carried out on corporate taxes of the 19 member countries of the G20 (Group of Twenty) ─ see chart on top: these are the leading rich and emerging economies of the world.

Based on 2012 data, the CBO says the average French effective corporate tax rate was 20%. 

The C&AG report refers to the 2017 ‘Paying Taxes’ annual report produced by PwC and the World Bank. Its model company is a small firm with 60 employees which sells all its output of flower pots in its domestic market. The C&AG report says:

 “France had the second highest statutory rate at 38% but the lowest effective rate at just 0.4%.”

However, France has a headline rate of 15% for small firms and the PwC/World Bank report for 2014 showed that the model company's effective rate for France, based on taxes paid, was 7.4%. The plunge to 0.4% in 2016 reflects a 6% wages tax credit with a limit of up to 2.5 times the national minimum wage. This tax credit took effect in 2015.

The French 15% rate applies to small to medium companies (SMEs) with a turnover of less than €7.63m and applies to the first €38,120 of profit ─ from 2019 the rate will apply to all SMEs.

The OECD survey of the French economy in 2013 did highlight how large listed companies in the main index of the Paris Stock Exchange, took advantage of particular tax breaks:

France’s high statutory tax rate is coupled with low revenues, measured either as a share of GDP or total tax revenues because of the large number of loopholes and tax breaks. As the Conseil des Prélèvements Obligatoires (French Tax and Social Charges Board, 2009) points out, the result is an effective tax rate paid on realised profits of only 8% for companies included in the CAC40 (the main index of the Paris stock exchange) and 22% for SMEs (firms with up to 249 employees). More generally, the report finds that the effective tax rate diminishes as company size increases. The three major tax expenditures include: i) the tax consolidation regime, whereby the profits and losses of individual companies belonging to the same group may be consolidated (CPO, 2010), ii) the deductibility of interest payments on debt financing, and iii) the tax credit on investment in research and development. The way global corporations consolidate their profits depends on tax rates in other countries, so having a high nominal tax rate naturally encourages businesses to pay taxes elsewhere. If interest income is taxed at the household level, interest deductibility can be justified to avoid double taxation. The government’s decision to cap the deductibility of interest payments on borrowing goes in the direction of double taxation but at the same time will reduce the differential cost of debt and equity financing.

As for the Irish effective rate of 12.4% compared with the headline 12.5% rate for a company such as Google, the tax it declares in Ireland is after massive profit shifting.

In 2015  €12bn was transferred from Google Ireland Limited via a Dutch company to an Irish shell company in Bermuda and Google had an effective tax rate of  6.4% outside the US in 2015.

Apple avoided using the Double Irish loophole and using offshore Irish shell companies was able to report a tax rate of 1.9% on profits made outside the US in 2012.

France's standard corporate tax rate 2017 is 33.33% and this headline rate will be progressively reduced to 28% by 2020.

These are US Tax Foundation definitions:

The statutory tax rate is the rate levied on the next dollar of taxable profit. While this measure leaves a lot of information out, such as deductions and credits that reduce liability, it can have an impact on some business’s decisions by itself. One important decision it has an impact on is the location of profits. If the next dollar of profits is taxed at the statutory rate, companies have an incentive to locate their profits in countries with lower statutory tax rates. All else equal, high statutory tax rates tend to drive profit shifting.

The average effective tax rate is basically the amount of tax a corporation in a country pays divided by its income. As an all-in measure of tax burden, it considers the statutory tax rate, deductions, and any credits that reduce a corporation’s tax liability. Companies may look at the average effective tax rate when deciding which country to locate a new investment. All else equal, a company would rather put an investment in a country with a lower average effective tax rate because that investment will provide higher returns net of tax over its life.

The marginal effective tax rate is the tax corporations pay on a marginal investment, or an investment that makes just enough (in present value terms) to satisfy an investor, net of tax. This tax rate is mainly a function of the statutory tax rate and deductions corporations can tax on new investments, such as depreciation allowances. The marginal tax rate determines how much a company is willing to invest in a given country. The lower the marginal tax rate on new investment, the lower the pre-tax returns on those investments need to be to satisfy investors on an after-tax basis. As such, companies are more likely to pursue more investment projects when the marginal rate is lower.

Tuesday, October 24, 2017

Irish Health Service: On money spent it should be among world's best

If it was only spending money that mattered in delivering a key national social service, Ireland would have one of the best health services among rich countries - there is something rotten in the hybrid public-private system that 6 health ministers starting with Micheál Martin in early 2000, have been unable to fix. Stripping out inflation, total health spending per head doubled in Ireland and UK in 2000-2016 and rose 37% in Germany; 38% in Denmark and 25% in France.

Ireland in 2016 was among the richest countries on per capita spending (adjusted for price differences between countries PPS) according to the OECD: Ireland- US$5,528; Germany $5,551; Denmark $5,199; France $4,600; Sweden $5,487; Spain $3,248; UK $4192. Europe's richest countries Norway and Switzerland spent $6,647 and $7,919.

The US per capita spending in 2016 was $9,892 compared with Canada's $4,644.

The above data relate to current expenditure. On investment in capital equipment/infrastructure, for some of the boom years at 0.6% of GDP (this denominator is inflated by a third due to tax avoidance etc) we tracked Norway; it was at 0.51% in 2013; 0.46% in 2014 and 0.39% in 2015 (this was the year of Leprechaun Economics when Ireland's GDP jumped 26% - so the realistic ratio was higher), while Denmark and France were at above 0.60% in each year.

The above was a comment made in response to an Irish Times op-ed on Ireland's health service:

This is the winter our health system will finally collapse: The ineffectiveness of this year’s flu vaccines means hospitals will not be able to cope

Houses of the Oireachtas Committee on the Future of Healthcare Report, May 2017

Prof Sean Barrett of Trinity College, commented on The Irish Times' endorsement of the Oireachtas (Irish Parliament's bicameral system) report:

In September 2016 the Irish health service had 105,886 staff compared to 50,671 in June 1988 but there were 117,000 fewer hospital bed days performed compared to three decades earlier.

Central Statistics Office on health care comparisons

EU health care statistics  


Sunday, October 22, 2017

Global consumer goods companies struggle with sales

Investors have been increasingly buying consumer goods companies' stocks with no growth and at unreasonable prices. The FT's Jonathan Eley explains why they still seem like worthy investments.

Tuesday, July 25, 2017

FT columnist Lucy Kellaway moves on after years of deriding corporate bullshit

July 2017: Financial Times (FT) columnist Lucy Kellaway has been writing on the strange and indecipherable language of chief executives and their companies for over 20 years. She looks back at a career of deriding the hot air and asks: has it made any difference?


FT columnist Lucy Kellaway says chief executives need to have a hard think before deciding to join Twitter. She looks at the successes and failures of CEO tweeters including Tim Cook, Marissa Mayer, Elon Musk and Warren Buffett.


After 31 years at the Financial Times, management columnist and associate editor Lucy Kellaway is leaving to start a new career as a teacher. In an FT Facebook Live discussion with Gideon Rachman, she explains her move.


I’m becoming a teacher at 58 — this is why you should too | Lucy Kellaway | TEDx London Business School — After 31 years as a prominent and well-respected Financial Times columnist, Lucy Kellaway has made the decision to leave – to be a maths teacher. There are many programmes encouraging fresh graduates to enter the teaching profession, but what about seasoned professionals? In her talk, Lucy will reframe the way we think about being an educator and why it’s more important than ever to be one now.

Lucy Kellaway has spent the last three decades at the Financial Times writing columns that poke fun at corporate life, business jargon and management fads. She is the newspaper’s office agony aunt and inventor of the insufferable fictional character, Martin Lukes. In September 2017 she is leaving all this to be a maths teacher in an inner city school in London. In November 2016 she co-founded Now Teach, a charity designed to persuade high-flying fifty somethings from the corporate world to train alongside her. For nine years she was a non-executive director of Admiral plc.


FT columnist Lucy Kellaway explains how not to compose your summary on the networking site LinkedIn. She looks at the profiles of Hillary Clinton, former GE head Jack Welch and LinkedIn co-founder Reid Hoffman:


The last time Lucy Kellaway visited Unilever’s London HQ it was a rabbit warren of corridors, closed offices and wood panelling. Now it’s a vast glass and steel temple to the modern office — but is it any better?


Lucy Kellaway, FT management columnist, and Tyler Brûlé, editor-in-chief of Monocle and the FT’s Fast Lane columnist, go head to head over how we work today, and what the rules of office life should be.


Kellaway and Tang on rules for life | FT Life


Monday, July 10, 2017

Swiss basket of grocery items +91% more expensive than France in 2017

A Swiss basket of grocery items is +91% more expensive than France in 2017.

Switzerland is a wealthy country and the per head standard of living (based on consumption adjusted for price differences) is among Europe's highest. However, the rise in the value of the Swiss franc in recent years compared with the euro has made the country a very expensive place to visit and it is also bad news for low-income residents.

A snapshot comparison by Swissinfo of a 14-item list of basic groceries has revealed a +€27.74 (CHF30.38) difference between Switzerland (COOP supermarket in Lausanne) and France (Carrefour supermarket in Ferney Voltaire, near Geneva).


Thursday, June 22, 2017

Uber gets a backseat driver as Kalanick exits top job

John Colley, Warwick Business School, University of Warwick

As the ride-hailing company Uber lurched from one clumsy mess to the next, it had appeared that CEO Travis Kalanick would somehow ride out the storm. His recent resignation is an admission that the company needs to explore new avenues.
I wrote recently about tech CEOs who had protected themselves from the usual pressure from shareholders, and were able to freely dictate strategy and culture. I’m happy to say that Kalanick’s departure from the top job (he will stay on the board) signals that there is indeed a line to cross where even disenfranchised investors can assert their power. It is not hard to see why: Uber is facing up to some tough decisions.

Aside from the rows around a damaging corporate culture, news that rival Lyft has increased its share of the US ride hailing market from 17% to 23% is rapidly destroying investor assumptions about this industry. Uber investors have stumped up US$12 billion in the belief that this is a winner-takes-all market. That now looks not to be the case.

This is great news for the customer as low fares are likely to persist. Uber investors had been funding incentives to both customers and drivers in the hope that both would stay put once the incentives stopped. Evidence is beginning to suggest otherwise. Uber’s 2016 losses, largely driven by the funding of incentives globally and from the development of driverless car technology, were US$2.8 billion.

Flawed model

So where did that winner-takes-all belief come from? Well, investors had looked at Amazon, Facebook and Google. The first mover in those cases developed a large customer base attracted by an increasing number of suppliers. In turn, suppliers found access to large numbers of customers and had no motivation to go elsewhere. The software simply does the matching.

An Uber customer wants a quick pick-up and cheap fares while the drivers want to be busy generating higher wages. So, in theory, an app which offered both at a high level, and was first to market, should attract most of the drivers and customers.

However, the app is readily copied. Many taxi firms now have their own app with similar attributes. Customers may now have several ride hailing apps on their phones which they can check for the cheapest and most rapid arrival.

Additionally, drivers are self-employed and can switch their allegiances rapidly. This is not a recipe for world domination.

Rivals everywhere

Existing firms leap at the opportunity to expand. Lyft has proved that to be so by gaining US market share just as Uber’s reputation was soured by allegations of a sexist and macho culture. A major lawsuit from Google has only added to the sense of a company struggling to maintain its grip.

Uber can learn from Lyft, which has succeeded with a clear market focus, unhindered by unrelated diversification. Lyft has focused on ride hailing in the US alone. Uber has expanded globally and invested heavily in driverless car technology. Uber spent $2 billion in a Chinese market it has now exited under pressure from the local competitor Didi Chuxing.

In the Indian market, which is led by Ola, Uber was slow to adapt to very different market conditions and lost time and position. Even in the UK, Uber has faced competitive and political pressure from established taxi operators. Focus means being able to channel resources, knowhow and competitive strategy into one area. Uber has left itself open to attack on too many fronts.

Unfair fight

That brings us to Kalanick’s odd move into driverless car technology, taking on the might (and vast resources) of Google. Many of the world’s major car companies, with their own attendant resources and technology partners, are also investing heavily. Was Uber really going to win a fight against Ford, Mercedes, GM, and Tesla?

It is likely they are all further ahead than Uber. Indeed it is difficult to see what technology Uber has to offer in this particular market. Surely this is a prime opportunity for a deal where Uber supplies the demand while the more advanced partner supplies the technology and cars.

Kalanick’s ambition has been fundamental to the rise of Uber. With his departure from the CEO role, perhaps that ambition will give way to strategic sense. Kalanick was able to cling on for so long partly thanks to investors’ desire to unearth the next tech giant, which made them indulgent of the founder’s control. The hope must be that the Uber experience encourages investors to tighten the reins on tech executives. The job for the next CEO will be to convince investors and customers that it is worth sticking around to see how this all ends.

John Colley, Professor of Practice, Associate Dean, Warwick Business School, University of Warwick
This article was originally published on The Conversation. Read the original article.

Tuesday, May 23, 2017

Two Swedish economists foresaw the backlash against globalisation — here's how to mitigate it

Rodrigo Zeidan, NYU Shanghai

The first article in the series Globalisation Under Pressure looks at work from the 1930s that anticipated the backlash against globalisation.

Economists Eli Heckscher (1879-1952) and Bertil Ohlin (1899-1979) died more than three decades ago. But it’s fair to assume that neither would have been surprised by the underlying causes of Donald Trump’s election as president of the United States, or Brexit for that matter.

Their Heckscher-Ohlin (H-O) model of international trade – developed at the Stockholm School of Economics in the 1930s – clearly predicted today’s middle-class discontent bellowing at the ballot box.

The two Swedes recognised the simple but too-often-overlooked soft underbelly of global trade and growth: prosperity doesn’t distribute evenly. And workers in bustling export industries benefit at the expense of those who face foreign competition.

Inherent inequality

Eli Heckscher’s work predicted today’s middle-class discontent bellowing at the ballot box. Slarre via Wikimedia Commons

Building on the H-O model, academic economist Branko Milanovic has described in an elegant chart how income around the world changed from 1988 to 2008. Only one income bracket failed to get significantly richer: those around the 80% percentile. That’s the middle class in the developed world and the upper class in poor countries.

Ironically, Milanovic’s graphic both resembles and reflects the proverbial elephant in the room that carried Trump to victory in regions such as the US Rust Belt, which are populated by those he characterised as forgotten Americans.

It supports Heckscher and Ohlin’s fundamental premise about the unequal consequences of economic growth – rare is the tide that lifts all boats. Milanovic demonstrates the disparities of our era of globalisation: the rich get richer, the poor get much less poor, and a big chunk of the middle class gets left behind.

The argument is relatively easy to understand. Assume that in a country there are only two industries, divided into high-skilled and low-skilled workers who produce high-tech content (product H) and low-tech content (product L).

Country A (say the United States) has proportionally more high-skilled individuals than country B (let’s call it China). Let’s further assume that both the Chinese and Americans have similar tastes for products. That’s a lot of assumptions, but the intuition should be straightforward: countries with a higher proportion of more educated workers have an advantage in producing more technologically advanced goods. It’s as simple as that.

In the absence of trade, the United States would produce more goods and services that use high-skilled workers than China. A simple demand and supply graph illustrates this:

Without trade, the United States produces more high-tech goods and consumers pay a lower relative price for them than in China. But here is the important point: in the US, the wages of high-skilled workers are lower than in China. Not lower in absolute but in relative terms.

Great programmers in the US are handsomely rewarded because the country can export the goods and services they produce. If Apple, Uber or Facebook could sell and operate only in the US, the demand for high-skill workers would be much lower than it is today, and the country’s lower-skilled labor force would not face such strong competition from abroad.

With trade, low-tech goods become relatively cheaper in the US. But, critically, people who work in low-tech industries there face the prospect of lower wages, even if the overall price of goods and services in the economy falls, because there is less demand for their jobs. Trade increases job growth in the US economy, but in some industries there are job losses.

Bertil Ohlin was Eli Heckscher’s student and collaborator. Wikimedia Commons

The argument is relatively easy to understand. Countries with a higher proportion of more educated workers have an advantage in producing more technologically advanced goods.

Mitigating harm

There’s plenty of other evidence that trade has an impact on income inequality. Reviews from 1990 and 1995 describe the old evidence on the relationship between trade and inequality; there’s a 2003 exploration of the link between opening up to trade and inequality in Argentina; and a review of cross-country studies with data from the 1990s and early 2000s.

More recently, a 2015 update of the H-O model has extended the empirical evidence to show how trade increases the technology level in all partners and a 2012 paper has examined urban wage distribution in China.

But all the empirical evidence on the importance of trade to income distribution comes to fruition in a 2014 paper that finds clear evidence that openness to trade increases wage inequality at lower levels of income (within the OECD). It also found there was no significant effect at higher levels of income.

The H-O model sharpens focus on the realities of our modern world. Inflation has been strikingly absent in the rich world during the 21st century due largely to the growth and efficiency of international trade. This has made products cheaper for the average American but, at the same time, globalisation has significantly spurred income inequality.

The model provides a direct link between the Chinese internal migrant working long hours in a Shenzhen factory and the Silicon Valley employee enjoying an elitist’s workday, replete with healthy snacks.

Many economists had mistakenly expected Heckscher and Ohlin’s canon to become less relevant, but that’s changing.

Recent work from MIT has provided the first and timely systematic evidence that the inequality effects of the H-O framework are much more profound and longer lasting than previously thought.

The fact is that too few people acquire better skills as quickly as needed; too few disenfranchised families relocate to more promising regions; and the combination of decaying skills and lack of mobility generates a downward spiral of discontent.

But all is not lost. Trade lifts all countries and contributes to improvement in productivity and the range of products at our disposal, and engenders myriad innovations that make modern life easier. Increased trade has even helped improve human rights and made companies more socially responsible.

And we have known the optimal policy regarding trade agreements for a long time but failed to implement it effectively. Free trade has a necessarily distributive effect. And the correct path is to have trade agreements with specific programs to diminish its negative impact on certain levels of income.

In NAFTA, for instance, the Transitional Adjustment Assistance (NAFTA-TAA) program had as its primary goal to assist workers who lost their jobs or whose hours of work and wages were reduced as a result of trade with – or a shift in production to – Canada or Mexico.

We should concentrate on designing programs complementary to trade agreements, such as the TAA, especially as we now know some of the distributive effects of free trade don’t dissipate easily as previously thought.

Ignoring Heckscher and Ohlin’s prescient wisdom has cost many people their livelihoods. The best path for society is to increase trade agreements but only if accompanied by fail-safes for the segments of society most likely to be adversely affected.

Policymakers and researchers forgot this for too long and we are now facing the backlash.

Rodrigo Zeidan, Associate Professor, NYU Shanghai and Fundação Dom Cabral, NYU Shanghai

This article was originally published on The Conversation. Read the original article.

Thursday, May 18, 2017

Brexit: London's loss in euro trade

Financial Times: London's euro clearing dominance has been in the spotlight since the Brexit vote, as Europe would like this returned. The FT's Philip Stafford and Daniel Hodson, chairman of FSNForum and board member of Vote Leave, discuss the merits of such a move.


Wednesday, May 17, 2017

Thug Nation: Venezuela’s broken socialist revolution

FT Video: Once touted as a beacon of revolutionary socialism, today there are fears that Venezuela is on the cusp of becoming a failed state. Andres Schipani and Ben Marino report on the spiralling violence and economic, social and political crisis facing the oil-rich nation.

Last year 29,000 people were murdered in Venezuela


The Economist reported last week:

YOU find them driving taxis in Buenos Aires, working as waiters in Panama or selling arepas (corn bread) in Madrid. The number of Venezuelans fleeing hunger, repression and crime in their ruptured country grows by the day. For years, Latin American governments kept quiet as first Hugo Chávez and then his successor, Nicolás Maduro, hollowed out Venezuela’s democracy. Now their economic bungling and Mr Maduro’s increasingly harsh rule are causing a humanitarian crisis that the region can no longer ignore. At last, it is not...He retains the support of 25% of the population and of the security forces (some from ideological conviction, others because of perks or corruption). His recent actions suggest that he plans to turn Venezuela into an autarkic dictatorship in the mould of Fidel Castro’s Cuba. 

Tuesday, March 14, 2017

Seth Meyers and John Oliver show how Trumpcare will kill many Americans

On Monday the US Congressional Budget Office report on Trumpcare — the replacement for the health insurance system that the Obama Administration proposed for Americans without employer provided health insurance — estimated 14 million people losing insurance in the first year 2018 and 24 million by 2026, with premiums soaring for older, lower-income Americans. The CBO says Trumpcare would cut the annual budget deficit about $30 billion a year in a $19 trillion economy. It adds: “In 2026, an estimated 52 million people would be uninsured, compared with 28 million who would lack insurance that year under current law.” That’s a fifth of the non-elderly population left to fend for themselves, nearly double the current proportion.

Last January, days before Donald Trump became president, he said in an interview that he was nearing completion of a plan to replace President Obama’s signature health-care law with the goal of “insurance for everybody."

The Los Angeles Times reports that among those hit the hardest under the current House bill are 60-year-olds with annual incomes of $30,000, particularly in rural areas where healthcare costs are higher and Obamacare subsidies are greater. In nearly 1,500 counties nationwide, such a person stands to lose more than $6,000 a year in federal insurance subsidies. Ninety percent of those counties backed Trump, the analysis shows.

And 68 of the 70 counties where these consumers would suffer the largest losses supported Trump in November.

The billionaire champion of poor whites is going to be responsible for the premature deaths of older supporters — in effect killing them.

Seth Meyers takes a closer look at Trump's outlandish claims on wiretapping and the Republican plan to repeal and replace Obamacare.


The Republican health care bill could leave many Americans without affordable coverage. Last Week Tonight's catheter cowboy returns to morning cable news to explain that to Donald Trump.


The New York Times says that two of the biggest tax cuts in Republican proposals to repeal the Affordable Care Act (Obamacare) would deliver roughly $144 billion over the coming decade to those with incomes of $1 million or more, according to a congressional analysis.

Wednesday, March 08, 2017

Interview tricks of Trump's chief mouthpiece Kellyanne Conway

Kellyanne Conway has a supernatural ability to derail any interview that paints Donald Trump in a negative light. How does she do it?


Mika: Here's Why I Won't Book Kellyanne Conway | Morning Joe | MSNBC  


Jake Tapper of CNN on interviewing Kellyanne Conway - CONAN on TBS 



Sunday, November 06, 2016

The Price of Certainty

A short film The Price of Certainty, by a Jewish survivor of wartime Poland:

If you have high “need for closure,” you tend to make decisions quickly and see the world in black and white. If you have a low need for closure, you tolerate ambiguity, but often have difficulty making decisions. All of us fall naturally somewhere on this spectrum.


Saturday, September 10, 2016

Foreign countries not US have first call on Apple's $200bn+ cash trove in Irish shell firms

It's not a recent development for tax offices to look behind sham/artificial structures in dissecting schemes to reduce tax. In recent years the abuse in the CT area has also focused on sham arrangements.

The House of Commons Public Accounts Committee in 2013 rejected Google's argument that sales of corporate advertising were completed and thus invoiced in Dublin as Google UK staff only partially handled sales issues with clients — "an argument which we find deeply unconvincing on the basis of evidence"; "Google has also conceded that its engineers in the UK are contributing to product development and creating economic value in the UK"; "HMRC needs to be much more effective in challenging the artificial corporate structures created by multinationals with no other purpose than to avoid tax."

Edward Kleinbard, professor of law and business at the University of Southern California, is a former chief of staff of the US Congress's Joint Committee on Taxation, and he testified at the US Senate hearings on Apple in May 2013. Prof Kleinbard wrote this week on The European Commission ruling that Ireland provided Apple with illegal state aid:

Tax here was just the instrument for delivering state aid. The US Treasury is expert in detecting tax shams used to disadvantage US tax collections, and should have recognized that the EC similarly is making a sham arrangement argument.

Kleinbard says Jack Lew, US Treasury secretary, and Apple are wrong when they argue that only the Internal Revenue Service has a legitimate claim to Apple’s $230bn in largely untaxed offshore cash, technically in Irish offshore shell companies but actually in the United States. "This is a misstatement of US law."

Apple says 65% of its earnings are foreign-related but it also contradicts itself by saying most profits are generated in the US. However, the the profits it books overseas puts overseas tax offices other than the IRS ahead in the taxing queue. Apple settled a tax fraud case last year with Italy and there are more to come.

For nearly 100 years the nation has followed the principle that the jurisdiction in which income arises (the “source jurisdiction”) has priority in taxing cross-border income. To prevent double taxation, a US company can claim a credit against its US tax bill for levies already paid to source countries. So US tax on a dividend repatriation is a residual liability of the company, payable only to the extent that source countries have not first taxed the income.

Kleinbard says the United States aids and abets US multinationals in their stateless income tax gaming, whose object is to skim profits from countries where income actually is earned, and then to deposit those profits in a zero or near zero tax receptacle. That is the source of Apple’s offshore cash hoard totaling more than $200 billion.

Distilling the facts to their essence, in Europe, Apple has deployed the almost farcical charade that its income from retail sales in Germany, for example, really is earned by an Irish subsidiary that hovers just beyond the German border, doing all the value-added work to offer Apple products to German retail customers, but never quite putting a foot down in Germany.

For the United States, the game is different, but just as artificial. Apple’s plan, authorized in broad outline by IRS regulations, was to create an Irish subsidiary, stuff it with seed money, and to pretend that the subsidiary had its own independent business agenda. Apple Cupertino and Apple Ireland then entered into an “arm’s length cost sharing agreement” of the sort that two independent drug companies might employ to jointly develop a new drug.

The Irish shell companies were available to Apple for massive tax avoidance with reported sales in several countries artificially suppressed. The EC views the structure as a sham and it's unlikely that it was commonly available to other companies.

What makes this a state aid case rather than a tax one is that there is no plausible explanation for Ireland ceding its tax authority other than its understanding that jobs would follow. The parties reverse engineered a methodology to yield an agreed minimal tax take.

Edward Kleinbard: Apple’s Ireland tax avoidance should spur major reforms

Fortune magazine: Nearly 50,000 people have signed two petitions calling on the US Treasury Department to launch an investigation into Apple’s tax practices.


Apple's stateless firm tax claims likely broke Irish law

Apple's tax woes as Irish conventional wisdom fails again

Ireland's Apple tax appeal to European court likely to fail

EU vs Apple: Ireland's €13bn tax windfall will be shared

How Apple found a bigger tax loophole than the Double Irish

The fable of the frog and Ireland's response to Brexit

Apple's foreign tax rate fell from 12 to 2% in a decade

Top 10% rich world incomes up 40% in 20 years as growth slowed

Italy's lost decades but average Irish standard of living lower

Monday, August 01, 2016

One month after Brexit

The question for markets after the referendum was whether the UK’s Brexit decision would result in a short, sharp shock or a more fundamental re-set. One month on, uncertainty persists. The FT’s senior investment columnist John Authers assesses sentiment.


Talking Trade: The FT’s Sebastian Payne rounds up the week’s Brexit news, including International Trade Secretary Liam Fox’s first foray into diplomacy and Prime Minister Theresa May’s visit to Rome.

Lionel Barber, FT editor, and Janan Ganesh, political commentator, discuss how the UK’s three Brexit ministers — Boris Johnson, Liam Fox and David Davis — plan to negotiate exit from the EU, and how they will work

Wednesday, July 27, 2016

How Trump changed US conservatism

Ed Luce of the FT talks to political commentator EJ Dionne about how the Republican party has been transformed in recent years and how the rise of Donald Trump is changing conservative politics.


Monday, May 30, 2016

China’s economic miracle under threat from slowing economy

China’s economic miracle is under threat from a slowing economy.

A dwindling labour force and turbulent stock market are adding to the country’s woes.

The FT investigates how the world’s most populous country has reached a critical chapter in its history. Jamil Anderlini narrates.

Will the End of the Chinese Miracle Bring Down Southeast Asia? — Knowledge @Wharton


On April 14, 2016, the John L. Thornton China Center and the Hutchins Center on Fiscal and Monetary Policy at Brookings hosted a discussion examining challenges and opportunities facing the Chinese economy, as well as the financial and economic links between China and the world. Ben Bernanke, former Federal Reserve chairman, joins later in the discussion.


Thursday, April 14, 2016

Irish Times returns to property porn in 2016 with fawning editorial

Ten years ago the Irish Times' Thursday property supplement typically comprised 60 pages — mostly of advertising at €10,000 to €15,000 per page and puff pieces on expensive properties.

We first published this article in 2006 when property porn was at its height in Ireland:

Global Survey 2006: Cost of comparable house in Dublin, Ireland, could buy 9 in Houston, Texas, 3 in Amsterdam, 2 in Sydney and Tokyo

In 2005, the Collins English Dictionary defined property porn as "a genre of escapist TV programmes, magazine features, etc showing desirable properties for sale, especially those in idyllic locations, or in need of renovation, or both."

Ever seen the nauseating 'Lifestyles of the Rich and Famous' American television series that ended each episode with the grovelling host using the catch phrase "champagne wishes and caviar dreams"?

Ten years later after bubble and bust, The Irish Times newspaper is back in full flight with fawning editorial on expensive properties.

Today the main feature is titled 'Riverdance duo’s Howth home for €9.5m' with a strapline 'Moya Doherty and John McColgan, are downsizing. Their 9,000sq ft home is on the market (picture above).

Madeleine Lyons, property editor and special reports editor of The Irish Times, writes:

What’s prophetic is that the site they chose was one of the finest in the capital, and has only been enhanced since. This is reflected in the €9.5 million minimum asking price through Ganly Walters. Danes Hollow will be one of the best properties to come on the market in Dublin this year.

With further elegant homes in London, Manhattan and Martha’s Vineyard, Danes Hollow might be just another part of the couple’s portfolio, but it has that something special.

As the agent puts it: “Whoever buys this property doesn’t even know that they want it. It’s when they see it for the first time that they will know.”

What is part of the property porn genre is the bullshit or exaggerated lexicon of the property industry: so the couple of course have "elegant homes in London, Manhattan and Martha’s Vineyard" but because a place is expensive doesn't mean its elegant!

Property porn typically gives a reason why the property is put on the market and in the past The Irish Times has used "downsizing' as a reason when in fact the vendors were trying to settle bank claims — I'm not suggesting that this is relevant is this case but the fact is that the content is advertorial not objective information.

There are other properties of the rich/ well off that are featured today. Note again the bullshit lexicon used by the freelance writers.

Fishing rights and island included in Co Cork for €3.5m — A sensitive renovation and makeover, costing €2 million, makes this Georgian gem, on the banks of the Blackwater in Fermoy, one of the best of its type in Ireland

Modern drama with rural charm for €2.8m — This Co Meath house near Collon has been tastefully rebuilt and offers plenty of period features, while the extensive grounds are perfect if you – or your horse – like a bit of space

Edwardian elegance in Killiney for €2.8m — Extended in 1990, Steeplewood is a detached period house on beautiful gardens

Smart mix of old and new in Dalkey for €1.95m — Spacious home on Sorrento Road has new enclosed patio area at front of house

Donnybrook five-bed with oodles of potential for €1.4m — Bring your architect with you when you go along to view this one

Show-stopping gardens and seclusion on Sorrento Road for €1.35m — Secluded three-bedroom property with gardens as outstanding feature

A redesigned upside-down mews in Ballsbridge for €950,000 — Delightful town garden with giant ferns and evergreens, raised patio and spot lighting