takingpitches

On cue, a FT front page headline of the dire consequences of fragility when things go bad:

The US has gained 387,000 managers and lost almost 2m clerical jobs since 2007, as new technologies replace office workers and plunge the American middle class deeper into crisis…The number of clerical workers such as book-keepers, tellers, data entry keyers, file clerks and typists has been falling, pointing to a structural decline. The number of retail cashiers has also dropped – indicating that internet shopping and self-checkout systems may be eroding another occupation.

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Just informational – when you hear discussion about corporate tax avoidance, transfer pricing is a lot of what they are referring to, a structure based on a Libor-like, non-arms length, incestuous self-reported fake transactions.

It treats multinationals as if they were loose collections of separate entities operating in different jurisdictions, giving companies huge scope to move income around the world to minimise their tax liabilities.

One of the main vehicles of corporate tax avoidance is a practice known as transfer pricing. Under international rules, transactions between company subsidiaries are supposed to be priced as if they were conducted “at arm’s length” between unrelated parties. In practice, though, the price can be adjusted to move profits to the lower-tax jurisdiction and expenses to the higher-tax one. The more complex the transaction, the easier this becomes. Many tax-haven subsidiaries are essentially shell companies that exist only to hold intellectual-property (IP) rights and charge other parts of the group for their use or provide other “services” at above-market rates. Transfer pricing (really mispricing) is sometimes also used to load costs onto countries that offer generous subsidies, especially in extractive industries. It has become a key plank of multinational tax strategies.

Technology companies, with oodles of IP to shift around, are avid practitioners of the art. Google, for instance, avoided a tax bill of around $2 billion in 2011 by moving almost $10 billion into a unit in Bermuda, a jurisdiction that levies no corporate income tax. Bermuda is the legal residence for tax purposes of an Irish subsidiary which collects royalties from another Irish division which in turn had collected revenues from ads sold across Europe (a structure known as the “Double Irish”). To avoid an Irish withholding tax, the company added a “Dutch Sandwich” to its tax-planning menu, routing the payments to Bermuda through a shell in the Netherlands. The end result is that there is little connection between where the economic activity takes place and where the profits are booked.

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With some hiccups, a New York City resident over the last 15 years opens his renewal lease annually to find a rent increase.

Now the WSJ reports that the process has started to reverse itself, correlating with the drop in finance jobs:

Back in 2006, nearly 60% of new renters worked in the financial sector; now about 40% do. Workers in creative fields and technology have nearly doubled, now making up nearly three out of 10 renters, the report found.

As a result:

An influx of artists, designers, young people in the city’s burgeoning technology sector and other industries is helping to drive rent prices down because they typically make less money than those in financial services, which has seen weaker job growth, according to the report by real-estate marketing consultant Nancy Packes, released with SteetEasy.com and On-Site.com, a national leasing and tenant screening company.

“Lower wages are contributing to lower rental growth,” Ms. Packes wrote. “The highly compensated finance sector is losing market share to the technology and creative industries.”

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We have to ask ourselves whether we are being attacked and whether we do not want to know it yet.

There is our corporate IP, the stealth jet fighter, and now our press.

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The Economist last week tackles the question of the Peter-Thiel style argument regarding the importance of recent innovation.  It’s an overall so-so job but there are some complex, but fascinating metaphors and arguments on how innovation’s benefits might circulate through the economy over time.  Here is one:

And information innovation is still in its infancy. Ray Kurzweil, a pioneer of computer science and a devotee of exponential technological extrapolation, likes to talk of “the second half of the chess board”. There is an old fable in which a gullible king is tricked into paying an obligation in grains of rice, one on the first square of a chessboard, two on the second, four on the third, the payment doubling with every square. Along the first row, the obligation is minuscule. With half the chessboard covered, the king is out only about 100 tonnes of rice. But a square before reaching the end of the seventh row he has laid out 500m tonnes in total—the whole world’s annual rice production. He will have to put more or less the same amount again on the next square. And there will still be a row to go.

Erik Brynjolfsson and Andrew McAfee of MIT make use of this image in their e-book “Race Against the Machine”. By the measure known as Moore’s law, the ability to get calculations out of a piece of silicon doubles every 18 months. That growth rate will not last for ever; but other aspects of computation, such as the capacity of algorithms to handle data, are also growing exponentially. When such a capacity is low, that doubling does not matter. As soon as it matters at all, though, it can quickly start to matter a lot. On the second half of the chessboard not only has the cumulative effect of innovations become large, but each new iteration of innovation delivers a technological jolt as powerful as all previous rounds combined.

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In a world where central bank policy has been top of the fold news for five years now, it’s important to understand how credit is created and where it can go after created.

As explained in this excerpt from Richard Werner on qfinance, private banks create the bulk of credit, and it can be allocated in three ways — for growth (GDP growth or goods and service), for consumption (depending on the slack in the economy, either real GDP growth or CPI when too much chasing too few goods or services), or for asset inflation (non-GDP growth).

The lesson from recent history is that we don’t pay enough attention to how it is allocated, particularly when it is allocated for the non-GDP growth, stoking and allocating bubbles in the economy.

[I]nterest rates are far less important in the economy than is generally claimed. Instead, the quantity of credit is the most important variable determining growth, asset prices, and exchange rates.

The most important institutional reality that has been neglected by theoretical equilibrium economics is   the key function banks perform: they create between 95% and 98% of the money supply. The first and most important form of privatization that has swept the world has been the privatization of the creation and allocation of money, which is implemented by privately-owned commercial banks…

Banks do not lend money. “Lending” refers to transferring control of the lent object to the borrower. If I lend you my car, I can’t drive it at the same time. That’s not what banks do when they issue a “bank loan.” Instead, they are allowed by the current regulatory framework to create new money out of nothing—which is called “credit creation.” The collective decisions of commercial bank staff thus determine how much money is created, who gets the newly created money and to what use it is put.The collective decisions of commercial bank staff thus determine how much money is created, who gets the newly created money and to what use it is put…

There are some simple rules for sound banking and sound economics that need to be followed. Whenever credit is created and used to increase the amount of goods and services provided, it will result in noninflationary growth; more money comes about, but also more goods and services. Whenever credit is created and used for unproductive purposes, inflation comes about; more money chases limited goods or assets. The unproductive credit creation can take two forms. When credit is extended for consumption, it will result in consumer price inflation. When credit is extended for non-GDP transactions (which means mainly financial and real estate transactions), there will be asset inflation. Both cases are unsustainable and, if sufficiently large, result in banking and economic crises.

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We assume — perhaps sometimes too smugly — that jobs lost through waves of innovation are replaced with other jobs.  In other words, dislocations are temporary as education, geographical moves and other changes help the labor force readjust to new jobs.

Steel workers become health care workers.

But what if it’s not always true — what if you have a more permanent change in the economy such that labor loses even while the economy grows?

About the robots: there’s no question that in some high-profile industries, technology is displacing workers of all, or almost all, kinds. For example, one of the reasons some high-technology manufacturing has lately been moving back to the United States is that these days the most valuable piece of a computer, the motherboard, is basically made by robots, so cheap Asian labor is no longer a reason to produce them abroad.

In a recent book, “Race Against the Machine,” M.I.T.’s Erik Brynjolfsson and Andrew McAfee argue that similar stories are playing out in many fields, including services like translation and legal research. What’s striking about their examples is that many of the jobs being displaced are high-skill and high-wage; the downside of technology isn’t limited to menial workers.

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