The Disappearance Of Savings

by: Steven Hansen

- How much of your paycheck do you save?
- For over 2 years, the savings rate in the USA has been slowing.
- Now they are approaching historic lows, and one wonders if the consuming class can reemerge as a driver of GDP.

I keep being surprised by how much consumers are spending. But it should come as no surprise that the savings rate nears all time lows.
The headline data this month showed some growth in consumer income and spending - with increase in expenditures far outpacing income growth. - and all at to the detriment of the savings rate. The savings rate worsened - and historically is extremely low.
Personal Savings as a Percentage of Disposable Personal Income
Consumer spending is far outpacing income - not good news.
Real Disposable Personal Income is up 1.2 % year-over-year (published 1.2 % last month and not revised), and real consumption expenditures is up 2.7 % year-over-year (published 2.5 % last month and not revised)
The graph below illustrates the relationship between income (DPI) and expenditures (PCE) - showing clearly income and expenditures grow at nearly the same rate over time - but currently consumption is greatly exceeding income..
Indexed to Jan 2000, Growth of Real Disposable Income (blue line) to Real Consumption Expenditures (red line)
And here is a non-indexed year-over-year growth of income Vs. expenditures.
Seasonally and Inflation Adjusted Year-over-Year Change of Personal Consumption Expenditures (blue line) to GDP (red line)
The real problem for the economy is that most are spending all of their income - and there is little room to spend more. Spending remains historically elevated and is near all time highs.
Seasonally Adjusted Spending's Ratio to Income (a declining ratio means consumer is spending less of its Income)
PCE is the spending of consumers. In the USA, the consumer is the economy. Likewise, personal income is the money consumers earn to spend. Even though most analysts concentrate on personal expenditures because GDP is based on spending, increases in personal income allow consumers the option to spend more.
Econintersect and GDP use the inflation adjusted (chained) numbers. Disposable Personal Income (DPI) is the income after the taxes. In this view one can see the large discrepancy in growth last month.
Seasonally & Inflation Adjusted Percent Change From the Previous Month - Personal Disposable Income (red line) and Personal Consumption Expenditures (blue line)
Yet year-over-year growth for income and expenditures is below GDP year-over-year growth - which demonstrates the consumer is not currently driving GDP growth.
Seasonally & Inflation Adjusted Year-over-Year Change - Personal Disposable Income (red line) and Personal Consumption Expenditures (blue line)
FRED Graph
Is the economy gearing up for a slow motion slowdown as consumers start spending less and less?

Algorithms With Minds of Their Own

How do we ensure that artificial intelligence is accountable?

By Curt Levey and Ryan Hagemann

Everyone wants to know: Will artificial intelligence doom mankind—or save the world? But this is the wrong question. In the near future, the biggest challenge to human control and acceptance of artificial intelligence is the technology’s complexity and opacity, not its potential to turn against us like HAL in “2001: A Space Odyssey.” This “black box” problem arises from the trait that makes artificial intelligence so powerful: its ability to learn and improve from experience without explicit instructions.

Machines learn through artificial neural networks that work like the human brain. As these networks are presented with numerous examples of their desired behavior, they learn through the modification of connection strengths, or “weights,” between the artificial neurons in the network. Imagine trying to figure out why a person made a particular decision by examining the connections in his brain. Examining the weights of a neural network is only slightly more illuminating.

Concerns about why a machine-learning system reaches a particular decision are greatest when the stakes are highest. For example, risk-assessment models relying on artificial intelligence are being used in criminal sentencing and bail determinations in Wisconsin and other states. Former Attorney General Eric Holder and others worry that such models disproportionately hurt racial minorities. Many of these critics believe the solution is mandated transparency, up to and including public disclosure of these systems’ weights or computer code.

But such disclosure will not tell you much, because the machine’s “thought process” is not explicitly described in the weights, computer code or anywhere else. Instead, it is subtly encoded in the interplay between the weights and the neural network’s architecture. Transparency sounds nice, but it’s not necessarily helpful and may be harmful.

Requiring disclosure of the inner workings of artificial-intelligence models could allow people to rig the system. It could also reveal trade secrets and otherwise harm the competitive advantage of a system’s developers. The situation becomes even more complicated when sensitive or confidential data is involved.

A better solution is to make artificial intelligence accountable. The concepts of accountability and transparency are sometimes conflated, but the former does not involve disclosure of a system’s inner workings. Instead, accountability should include explainability, confidence measures, procedural regularity, and responsibility.

Explainability ensures that nontechnical reasons can be given for why an artificial-intelligence model reached a particular decision. Confidence measures communicate the certainty that a given decision is accurate. Procedural regularity means the artificial-intelligence system’s decision-making process is applied in the same manner every time. And responsibility ensures individuals have easily accessible avenues for disputing decisions that adversely affect them.

Requiring accountability would reassure those affected by decisions derived from artificial intelligence while avoiding the potential harms associated with transparency. It also decreases the need for complicated regulations spelling out precisely what details need to be disclosed.

There already are real-world examples of successfully implemented accountability measures.

One of us, Curt Levey, had experience with this two decades ago as a scientist at HNC Software. Recognizing the need for better means to assess reliability, he developed a patented technology providing reasons and confidence measures for the decisions made by neural networks. The technology was used to explain decisions made by the company’s neural network-based product for evaluating credit applications. It worked so well that FICO bought the company.

This patented technology also provides accountability in FICO’s Falcon Platform, a neural-network system that detects payment-card fraud. Financial institutions and their customers need to understand why an incident of fraud is suspected, and the technology met that challenge, opening the door for Falcon’s widespread adoption by the financial industry. FICO estimates that today Falcon protects approximately 65% of all credit card transactions world-wide.

Falcon’s ability to detect suspicious patterns of behavior has also found use in counterterrorism efforts. Following the Sept. 11 attacks, the same neural network technology was used by airlines to identify high-risk passengers. That’s a far cry from Elon Musk’s assertion that artificial intelligence will cause World War III.

Until recently the success of systems like Falcon went underreported. Artificial-intelligence pioneer John McCarthy noted decades ago, “As soon as it works, no one calls it AI anymore.”

Further advances in artificial intelligence promise many more benefits for mankind, but only if society avoids strangling this burgeoning technology with burdensome and unnecessary transparency regulations.

Mr. Levey is president of the Committee for Justice. Mr. Hagemann is director of technology policy at the Niskanen Center.

Game for the Wealthy

The Ongoing Battle against Tax Havens

By Christian Reiermann

Game for the Wealthy: The Ongoing Battle against Tax Havens

The Paradise Papers offer only the most recent look into the widespread practice of tax avoidance. Governments around the world have taken steps recently to block such strategies, but it is unclear whether they will ultimately be successful.

Early this week, the financial world was rocked by the latest revelations about tax tricks used around the world by corporations and the super-rich. The leaks, which included 13.4 million documents and were labeled the "Paradise Papers," were the product of an international investigative consortium including journalists from influential German daily Süddeutsche Zeitung.

The cases uncovered are similar to those revealed in the previous leak, the Panama Papers, which triggered global outrage last year. The data describes how the rich and super-rich, international stars and companies try to avoid paying taxes in their home countries. It is a game for the wealthy.

The players are usually multinational corporations seeking to shrink their tax bill using convoluted structures. Tech-giant Apple once again stands accused of skullduggery, as does sporting-goods producer Nike. The accomplices are also largely the same. The deals in question invariably involve tax havens such as the Bermuda Islands, British dependencies such as the Isle of Man or Jersey, and European member states like the Netherlands, Luxembourg and Ireland.

The questions facing politicians are also the same ones that come up after every new substantial leak: How can we continue to tolerate a situation in which tax loopholes still haven't been closed? And why are EU member states still allowed to cheat their partners within the bloc out of tax revenues?

Indignation is understandable, though out of date on many points. Many of the tax avoidance strategies wouldn't work today because numerous countries have joined forces to eliminate tax loopholes. The malfeasance uncovered by the Panama and Paradise Papers is sometimes akin to looking in the rearview mirror.

But it is also true that closing all of the loopholes that exist is an arduous, sometimes frustrating political process, with the economic interests of the countries involved far too divergent to ensure universal satisfaction. There are, though, several positive developments. Cooperation between the fiscal authorities of dozens of countries is now taking place on multiple levels. For example, the largest industrialized and developing countries are working together within the framework of the G-20 on the so-called "base erosion and profit shifting" (BEPS) initiative.

Participating countries are no longer allowed to wait until they are asked, but must automatically provide fiscal information to participating partners. The regulation has been in force since September, with 50 countries having already joined and 50 others planning to do so.

Hurdles to Profit Shifting

International agreements will also supposedly make it more difficult for companies to shift profits from one country to another in an effort to pay the lowest tax rate possible. The most popular vehicle for doing so among multinationals is charging inflated "management fees" and brand licensing fees among susidiaries.

An international register has also been introduced to publicize the owners of companies, including those that participate in tax-saving models. That creates transparency, though it doesn't go quite far enough for German Chancellor Angela Merkel's outgoing administration. Berlin had initially wanted to list all companies and individuals who profited from the structures. But the proposal for such an expanded register was blocked by Britain and the Netherlands. Erstwhile German Finance Minister Wolfgang Schäuble and his allies from other EU member states could do nothing since tax issues must be passed unanimously in the bloc.

That also explains why there is no universal minimum corporate tax rate in the EU, an absurdity given that such minimum rates have been agreed on in Europe for tobacco taxes and VAT. In both cases, the taxes levied by EU member states may not fall below a predetermined level. But countries like Malta, for example, prevent the introduction of a minimum corporate tax rate in Europe.

The Mediterranean country is also known for trying to lure the owners of smaller companies to set up shop on the island. If they do so, earnings up to 5 million euros per year are only taxed at a rate of 15 percent. Anything above that is tax free.

Those opposed to tax avoidance measures only managed to close one tiny loophole. Recently, an informal minimum tax rate was applied to so-called license boxes. That model involves the separate declaration of income from patents, income which is then taxed at a lower rate. In Ireland and the Netherlands, such income is taxed at half the normal corporate rate. The problem, though, is that EU law is silent about what the minimum corporate tax rate should be.

An additional transparency initiative has thus far been held up by opposition in the U.S. and Japan. The initiative focuses on tax payments made by internationally active companies in their home countries. Thus far, only tax authorities in the countries involved have been able to learn where companies are taxed and how much they pay. Washington and Tokyo are opposed to making such information public.

Tax experts in the German government have understanding for national peculiarities when it comes to such regulations. "It's like in your private life," says one. "Not everyone who climbs naked into the bathtub likes to expose themselves at a nudist colony."

Half-Hearted U.S.

At the moment, the transparency initiative isn't being pursued, simply because any attempt to force it through would be futile. If all the remaining countries were to agree on more extensive steps, Japan and the U.S. would simply withdraw from the current deal. The resulting damage would be greater than the additional value.

Another way to undercut tax havens is to compete with them. But this option is unrealistic for larger economies. For countries with hardly any industry like Malta and Cyprus, it may be worth it to attract foreign profits with low tax rates. But larger countries with established industrial bases would ultimately lose money. They would, after all, have to offer the lower tax rates for foreign companies to their domestic companies as well, meaning they would lose more revenue than they would gain.

Making the battle against tax loopholes even more difficult is the fact that the world's largest economy, the U.S., is rather half-hearted when it comes to fighting tax havens. The state of Delaware offers an anonymous home to hundreds of thousands of shell companies. The U.S. government - whether Democratic or Republican - has also for years been rather indulgent when it comes to multinationals dodging the taxman, despite the fact that it is the U.S. itself that is shortchanged by the tricks employed by Google, Apple, Amazon and co.

Tax revenues from American multinationals should be flowing into U.S. coffers, just as all profits from German automobile manufacturers, for example, are taxed in Germany. Global tax doctrine, after all, holds that taxes should be levied in the country where products are produced.

But for decades, U.S. tax law has maintained a loophole for American companies. They are allowed to park their intellectual property - in the form of patents, licenses or film rights, for example - with subsidiaries based overseas, which means that those subsidiaries are taxed in the countries where they are based. That is why Apple, as the new document leak indicates, didn't decide to pay taxes on its profits back home once an Irish loophole was closed. Instead, the company went searching for tax havens that might offer it a new home.

An Arduous Process

Why does the U.S. government allow such a thing? Why doesn't it close this long-known loophole? There are two reasons. Early on, the regulation was established to prevent the U.S. from losing money. After all, if companies don't need to tax their profits back home, they also aren't able to claim deductions when they lose money. But when the highly innovative companies ultimately proved profitable, the tax authorities didn't remove the loophole. The U.S. government has always seen it as a kind of export subsidy for domestic companies. For Washington, the influence of American companies abroad is more important than the loss of billions in tax revenue.

So is the fight against tax havens in vain? Not necessarily, but it is an arduous process that doesn't produce quick results.

Once coalition negotiations are complete, Merkel's new government will have little option than to continue doing what it can to block the flow of money to tax havens around the world. Some of those involved in those negotiation believe that Germany has a number of tools at its disposal for putting pressure on tax havens. One of those is Wolfgang Kubicki, the deputy head of the business-friendly Free Democrats (FDP) who could become Germany'snext finance minister. He even thinks that Berlin could solve some problems unilaterally.

Regardless of who takes over the finance portfolio, he or she should focus most efforts on convincing European Union partners to stop offering improper tax privileges. And convincing the U.S. of the same. Because just as with climate change, without the world's largest economy on board, little will change.

Stranger than paradise: the truth about tax

The worst abuses of the system are not found on tiny islands

The free flow of capital is a hallmark of modern capitalism. Major economies can function as they do because capital moves freely across most national borders. This makes the world a more prosperous place, but at a cost: it creates opportunities for aggressive tax accounting, outright tax evasion, money laundering, and sanctions-busting.

The Paradise Papers — 13.4m financial documents belonging to offshore law firm Appleby — have revealed many cases of avoidance, some of them aggressive. As eye-opening as some of these cases may be, the papers contain no obvious instances of criminality. The line between tax evasion and tax avoidance is sometimes thin, but it is rarely invisible.

The fact that the Paradise Papers contain little or no direct evidence of criminality does not mean their publication was pointless. As more information enters the public domain about who owns what and where, it becomes easier to reform tax regimes to make them more efficient and equitable, and to pursue actual criminality.

The papers’ focus on offshore centres, however, is a distraction from the most important point.

There is more money laundering in London and New York than on small Caribbean islands.

Hundreds of British shell companies are implicated in £80bn of money-laundering scandals, according to a report released this week, calling for an overhaul of the UK’s “light touch” regulatory regime. Transparency International UK, a non-governmental organisation, has said the UK is home to a network that operates much like the companies at the heart of the Paradise and Panama papers.

If advanced economies want to prevent aggressive tax avoidance, they should look first to their nearest neighbours. Ireland, Luxembourg and, to a lesser extent, the Netherlands all have tax codes that have facilitated elaborate avoidance structures created by major multinationals. The European Commission is right to test the waters with regard to Ireland’s tax regime for Apple, arguing it constitutes illegal state aid. There is progress elsewhere. More G20 nations are implementing plans drawn up by the OECD to tackle “base erosion” and profit shifting. The rules are designed to improve transparency, close loopholes and restrict the use of tax havens, and collect up to $240bn a year in lost revenue.

If national governments want to stop corporations shifting their profits offshore, there are other measures they can take. The US, for example, could eliminate the “check the box” rule that permits American companies to exempt their foreign subsidiaries from corporation tax.

These rules were introduced 20 years ago as a simplification measure, but they were swiftly repurposed by tax planners to circumvent the anti-tax haven rules.

Successive attempts to withdraw the check-the-box rule were beaten back after lobbying by businesses. Broader US tax reform also presents an opportunity to tackle the issue of multinationals shifting profits to tax havens. The latest proposals would effectively levy a global minimum tax of 10 per cent, with the aim of discouraging companies from shifting profits to tax havens.

The Paradise Papers have provided a certain amount of entertainment, covering as they do the activities of individuals from The Queen to Formula One driver Lewis Hamilton. They will make a bigger contribution if they draw attention the convoluted structure of global tax regimes, and how those structures sap governments of funds while making criminality harder to detect.