Dan O'Huiginn

Alex Harowell has an interesting post about the economics of unemployment at AFOE.

In a strong economy, career paths tend to stay within a specialism, developing increasing experience and skill, and hence steadily increasing productivity. Or if somebody switches careers, it’s more a case of reculer pour mieux sauter, taking a temporary setback to end up somewhere more productive.

That doesn’t work in a recession. People who lose their jobs in bad circumstances are more willing to accept a new one, even with much worse pay and prospects.

In the long term, this is often a Bad Thing, both for them and the economy. They get onto a different career path, one coming more from desperation than choice, and will find it hard to switch back:

The unemployed are suddenly driven off their optimal productivity path, and are usually under pressure to take any job that comes along, no matter how suboptimal. Until they get back to where they were before the crisis, on their new paths or on their old ones, the economy will forego the difference between their potential and actual production.

The long-term cost of this depends on how desperate the unemployed are to take just any job that comes along. It’s better for the economy if they stay unemployed for a while before returning to a high-productivity career, rather than getting locked long-term into something less productive.

i.e. it all depends how society treats the unemployed. If you cut benefits, treat the unemployed like shit, and hussle them into whatever job is available (UK), you set the country up for long-term under-productivity:

If the unemployed sit it out and look for something better, you would expect a jobless recovery and then a productivity boom – like the US in the 1990s. If the unemployed take the first job-like position that comes along, you would expect a jobs miracle with terrible productivity growth, flat to falling wages, and a long period of foregone GDP growth. Like the UK in the 2010s. And if your labour market institutions are designed to prevent the information destruction in the first place, with a fallback to Keynesian reflation if that doesn’t cut it? Well, that sounds like Germany in the 2010s.

* lets ignore the fact that people may choose lower-paid (i.e. less productive) work for non-monetary reasons. Everything else works out much the same

I’ve seen some truly awful infographics of corporate ownership structures. I’ve even occasionally perpetrated them. But this image is a classic of the genre:

Pretty convoluted, huh?

It’s from Muddy Waters, a much-feted research and short-selling firm. They are arguing that French conglomerate Bolloré owns a lot of itself through intermediate companies. We’re looking here at Financière Moncey, an indirect subsidiary of Bolloré, and the point is to show “how complex the relationships actually are” among these structures.

Look a bit more closely, though, and you’ll see that most of the complexity is artificially added. The diagram is just the same structures repeated again and again and again.

Here it is again, with all the repetitions deleted:

Fair play to Muddy Waters for figuring out the ownership structure. That kind of structure is painful to make sense of, and it’s easy to miss the circular ownership.

But they do seem to be deliberately exaggerating the complexity. Presumably the point is to show that things are so complicated that only their analytic genius can make sense of it. It goes with some snarky digs at analysts in the report itself — “BOL has likely been misunderstood because the complexity of its structure makes it infeasible to use Excel to estimate the percentage of circular ownership“. Much as I enjoy their approach, I wish they could make their point without, well, muddying the waters.

I’m always pleased when campaigners about tax avoidance manage to find concrete examples of what they want changed. It takes a lot more knowledge and work, but is much more likely to have some impact in legislation.

So it’s great that 38 degrees have zoomed in hedge fund managers claiming their income as capital gains rather than wages. This not only gives them a lower tax rater, but makes it easier for them to claim numerous exemptions. The end result can be tax of just 12.7%.

Last week they released a report on the topic. It’s written by my friend Mike Lewis, and estimates the tax cost of this ‘loophole’ at £700 million per year.

38 degrees’ proposed solution is to explicitly treat payments to private equity employees as salary. That’s probably the right position for them to take — it’s a good change that might plausibly be implemented.

Personally, though, I’d prefer a much more radical change. It’s abhorrent to tax labour so much more highly than capital. This is something that brings out my inner socialist. The low rate of capital gains tax just shows that the system is rigged in favour of capitalists and against workers.

The psychology of pricing goes way further than just setting prices a few cents below a whole number.

Products that are recreational or luxurious benefit from rounded prices: Consumers were more inclined to buy a bottle of champagne when it was priced at $40.00 rather than at $39.72 or $40.28. However, for purchases that are utilitarian—a calculator, in this experiment—participants were more likely to buy at the higher non-rounded price.

Presumably we now associate non-round-number pricing with products competing on price. And that doesn’t mesh well with luxury goods, making them seem less rather than more desirable.

The New York Times has just turned out a long, worthy article on New York real estate owned through shell companies:

On the 74th floor of the Time Warner Center, Condominium 74B was purchased in 2010 for $15.65 million by a secretive entity called 25CC ST74B L.L.C. It traces to the family of Vitaly Malkin, a former Russian senator and banker who was barred from entering Canada because of suspected connections to organized crime.

Last fall, another shell company bought a condo down the hall for $21.4 million from a Greek businessman named Dimitrios Contominas, who was arrested a year ago as part of a corruption sweep in Greece.

This kind of story tends to leave me a bit confused. Isn’t it already a cliche that luxury New York (and London) real estate gets bought by dodgy businessmen and Russian oligarchs? I’m still glad it gets written, because sometimes the journalists will turn up something actually criminal, and the attention increases the chances of getting real estate sales subject to tighter “know your customer” rules. But I don’t really see why people outside the niche of corruption-tracking should care

Dsquared posts on Crooked Timber, asks only Greeks to comment. Comments thread predictably explodes into erudite snark, notably Joshua W. Burton’s take on Tennyson’s Ulysses:

. . . Come, my friends,
‘Tis not too late to seek a newer deal.
Push off, and sitting well in order smite
The hounding Euros; for my purpose holds
To sail beyond the market, and the wrath
Of all the western banks, until I die.
It may be that the Gulf will buy us up:
It may be we shall touch the Cayman Isles
And see the great Onassis, whom we knew.
Though much is taken, much abides; and though
We are not now that strength which in old days
Moved oil and cargo; that which we are, we are;
One equal temper of expatriate wealth,
Made weak by various new reporting regulations, but strong in will
To strive, to seek, to borrow, and not to yield.

Total, the French oil major, is closing its subsidiaries in tax havens. At least, that’s how the PR runs. So far there is nothing official on the website, and their statement to Le Monde is anything other than definitive. ‘Tax haven’ can mean anything you want it to, as can closing a ‘certain numnber’ of subsidiaries.

Still, it’s a step in the right direction, and PR moves can inadvertantly lead to real changes. If nothing else, it’ll be interesting to see the list of subsidiaries which they promise to reveal in March.

D-Squared expects Syriza to play chicken with the ECB — “present them with a fait accompli on the debt default, and gamble that they will not have the nerve to take measures which might have the effect of forcing Greece out of the Euro“. But Europe has had several years to get used to the threat of a Greek default, so will be able to contain it relatively easily. So Syriza either wins concessions or gets booted out of the Euro, but neither approach hurts the rest of Europe that deeply.

Would you dodge taxes, if you were sure you could get away with it? Absolutely you would, according to standard economic theory:

In the benchmark economic model, the key policy parameters affecting tax evasion are the tax rate, the detection probability, and the penalty imposed conditional on the evasion being detected.

But that doesn’t match reality, argues this paper on so-called “tax morale”. All but the slimiest of us have some inclination to pay up. If we didn’t then tax revenues would be far, far lower than they currently are.

Some economists have attempted to measure this. One way is to look at what gets paid in the absence of enforcement. There is absolutely no enforcement of the church tax in Bavaria, but 20% of people pay anyway. Or you can assume that migrant entrepreneurs bring attitudes to tax with them. In the US, there’s an 8% gap in tax evasion between Nigerian-owned and Swedish-owned companies.

Trade with Iran is one of the underlying themes of the corruption scandal which is engulfing Turkey. Sanctions on Iran led to it being excluded from the SWIFT network in March 2012, making it hard to send payment to Iran. But Turkey wanted to buy Iranian oil. So they figured out a dodge. Oil purchasers would deposit money at Turkey’s Halkbank, now at the centre of investigation. Iran would use this money to buy physical gold, which could be transported to Iran.

The entire deal infuriated the USA and others. While it was an open secret, the practitioners went to some lengths to conceal it — apparently involving Chinese front companies. Still, it’s plainly in the trade statistics:

We see a huge rise from March 2012 — when SWIFT blocked Iran — before a sudden collapse in August that year. The numbers are huge — the peak is over $1.8 billion dollars.

What happened in August 2012? Perhaps it’s linked to Obama’s Executive Order 13622, which brought gold under US national sanctions on Iran. This did not directly affect Turkey, but could have been twinned with similar pressure by American diplomats in Turkey.

What seems to have happened, in part, is another level of indirection. The gold, according to media reports, started being routed through UAE. Here’s how it looks in the trade statistics — a perfect match for the chart above.

[for more detail on this story, you could do worse than look at this report from May]

Why has this open secret turned into a corruption scandal now? Foreign Policy

While the gas-for-gold scheme may have been technically legal before Congress finally shut it down in July, it appears to have exposed the Turkish political elite to a vast Iranian underworld

The slow progress of oil tankers makes for a nice change from the jackhammer pace of news. Disputes about Kurdish oil exports have been pottering along for months, following the movement of a few tankers around the world.

So we have the SCF Altai, which has apparently been running oil between Ceyhan and Israel since June.

And across the Atlantic there’s the United Kalavrta, which has been loitering off Texas while Iraq and Kurdistan slug out ownership rights in court. Once the court ruled against Iraq, the tanker promptly turned off its tracking beacon, and is now presumably unloading as quietly as possible.

‘Tax inversion’ mergers are an increasingly-popular way for multinationals to dodge their tax bills, by arranging to be taken over by a corporation in a lower-tax jurisdiction. Fruit of the Loom, for example, used this dodge to move to the Cayman Islands back in 1998.

In the current wave, a string of companies are queuing up to move to Ireland through tax inversions, with pharmaceutical companies being the largest among them. Here the FT looks at a current example, Abbvie (US) planning to merge with Shire (UK/Ireland)

Reading the FT’s commentary makes it painfully clear that there is little business logic to a deal like this, beyond the massive extra profits to be had from dodging tax. And despite the political unpopularity, the IRS hasn’t yet found a way to crack down on them.

All this makes me look at the tech sector in a new light. Companies like Google, Apple and Microsoft are hoarding huge piles of cash in their non-US subsidiaries. They’ll be liable for a massive tax bill once they bring it back to the US — which they will need in order to pay it out as shareholder dividends.

The general assumption is that they are waiting for some kind of tax break — if not a permanent change in the law, at least a one-off amnesty which will let them bring the money home. I’m now wondering, though, whether some of them are also contemplating a tax inversion. Move out of the US, then finally claim your profits and pay out dividends at a lower tax rate. This analysis suggests it’s likely, but has found no tech companies even hinting that they are contemplating it.

When corporations have their computers hacked, they generally don’t talk about it. It’s awful publicity, and in most cases there is no legal requirement to disclose attacks. So sweeping it all under the carpet generally looks like the best response.

That means we have no idea how much sensitive data is being stolen from companies, or how many websites are paying protection money to avoid DDoS. The issue is somewhere on a spectrum between “significant worry” and “undiagnised catastrophe” — but, short of more mandatory disclosure laws, we can only speculate precisely where.

We can get a few hints, though, from the annual report of a committee overseeing the UK intelligence services. Perhaps through hosting “information exchanges” of companies involved in critical infrastructure, they have gathered some knowledge of the problem.

[One company] concluded that they had lost at least £800 million as a result of *** cyber attacks, and that’s quite a lot of money, even for a major company. But it’s very helpful, because otherwise you are just saying, ‘Well, some information has gone. So what?’

They also note a trend to getting sensitive information indirectly by hacking the “soft targets” represented by lawyers, accountants and other professional service firms.

The Annual reports of the Swiss Money Laundering Reporting Office (MROS) are slightly more entertainig than you might imagine. In particular, they have a section full of vignettes from the past year’s prosecutions.

the foreign client had indicated that incoming funds transferred
to the account would come from the sale of protective vests. However, it turned out that the payments related to the sale of tanks and high-calibre weapons
….
Particularly suspicious were undated contracts signed with the Ministry of Defence of an African country as well as other documents. The bank could not exclude the possibility that these contracts had been falsified and, given the close ties that the client maintained with African government officials, that the client was also involved in corruption
….
[MROS] concluded that the beneficial owner of the account was involved in extensive deliveries of weapons to Africa

They have plenty more — the 2012 report includes everything from “Brothel in the Caribbean”, to “Graft and cronyism in the South American energy sector”

How much does it cost to stage a coup? €21 million, according to this document.

It’s the work of a Congolese military group called the Union des Forces Révolutionnaires du Congo, keen to topple president Joseph Kabila.

Before they can do that, though, they need to raise some cash. So they have reached out to the diaspora — especially in Belgium — to chip in. And in the process, somebody has put together the budget. The UN got hold of this and included it in a report, giving us all a glimpse of coup planning.

Suborned generals aside, it’s the kind of vague document that will be familiar to any middle manager. Some areas are uncharted territory — “maintaining hold on power” after the coup is a single, unelaborated line item.

Other areas are elaborated into full-fledged fantasies. We know not only that broadcasters will be taken over, but what will be broadcast. “Day Zero” of the coup begins with 2 hours of classical music, for instance. I imagine it Clockwork Orange style, Beethoven playing as ministers are dragged from their beds.

The sums don’t add up, the plans seem half-formed, and the whole document smells of wishful thinking. And, having seen the bureaucracy required for government work, I can say for sure: this is one coup Uncle Sam won’t even think about funding.

For money-laundering, one of the most useful businesses is something involving small, high-value items which can be sold for cash. Ideally you want things bought by the public (so you can easily get money to/from anybody), resaleable (so you can get multiple transactions), and whose value is hard to quantify (so you can increase or decrease the price as required)

Art is great for this. China’s art market is most famed as a tool of corruption — a piece of art is an elegant gift for an official — but can also be used in other forms of fraud. It doesn’t much matter if it is good, bad, or even fake.

Susan Grossey reports on increased global interest in another sector: fine French Wine:

Chinese criminals have joined their Russian and Ukrainian counterparts in targeting French vineyards – not for tasting, but for owning….
[French anti-money-laundering agency Tracfin reported] that some buyers of vineyards were using “complex judicial arrangements with holding companies located in fiscally privileged countries”, making it difficult to establish the origin and legality of the funds brought into France.

Got some dirty dollars? Invest them in Argentina!. The government has a plan to let you turn tainted dollars legal; you just need to find an Argentinian to buy property with your cash:

The scheme, referred to locally as the “laundering law”, invites those with undeclared dollars to invest in property and the energy industry without facing penalties for their previous financial chicanery. The government believes that Argentines have about $160 billion tucked under their mattresses or hidden away in foreign bank accounts. That is about four times the value of Argentina’s foreign currency reserves.

Connected China, Reuters’ visualization of China’s power structures, is an impressive achievement.

Connected China explains the social and professional networks of China’s leaders, highlighting the interpersonal relationships that drive business, move markets and shape the political landscape in the world’s most populous nation.
The site also provides a rich interactive platform to showcase the best of Reuters’ coverage on Chinese politics, providing deep insight into China’s new generation of leaders with immersive, seamless integration of data, text, photos and video.

It reminds me of the Anatomy of Britain, a 1962 book in which Anthony Sampson delineated the interlocking circles which formed the British ‘Establishment’.

Similar, also, is Miguel Paz‘s Poderpopedia, a web guide to who holds power in Chile.

It sits in the same productive but uneasy territory between journalism and encyclopedia. It’s a difficult balance to strike — selective and cutting enough to make for interesting reading, but sufficiently comprehensive to serve as a reference.

I imagine that’s part of what Reuters want here — to become a reference resource for people reading about China, and a source of profiles and graphs which can be integrated into their other products.

They’ve certainly thrown a lot of work into it, and at first glance they got their money’s worth. It’s visually glorious — it helps that they worked with Ben Fry, who literally wrote the book on data visualization. I can’t say I now understand Who’s Who in China, but I have a slightly better chance than I did an hour ago. Assuming Reuters do a decent job of keeping this updated, I imagine I’ll come back many times in the future, whenever I’m trying to make sense of a Chinese power-broker.

Iran, under sanctions, can’t sell its oil. Nor does it have anywhere to put it — the country has continued production, using up all storage capacity. So it’s down to the last resort: tankers.

Iran has insufficient space to store the crude it cannot sell. So while it furiously works to build storage capacity on shore, it has turned to mothballing at sea.
….
The unsold crude is being stored in what has been estimated to be two-thirds of the Iranian tanker fleet. Most of the ships are sailing in circles around the Persian Gulf as Iran tries to sell the mostly heavy crude at bargain-basement prices.

International oil experts estimate that Iran is now warehousing as much as 40 million barrels — roughly two weeks of production — on the tankers. An additional 10 million barrels are in storage on shore.

Slick mobile-phone payment methods have a big downside: they make it too easy to spend money:

the easier and cheaper it is to spend money, the less control we have over our own spending. Which in turn means that ultra-convenient payments, probably using your phone in some way or another, are realistically going to be a luxury for the middle classes and a cause of stress and danger for families living paycheck-to-paycheck.