Finance

UNLIKE MOST rich European countries, America lacks a coherent public child-care regime. But it has come surprisingly close to having one. During the second world war Congress set up federal child-care centres to encourage women to work in factories; these were later dismantled. In 1971 Congress passed a comprehensive child-care plan. But President Richard Nixon vetoed the bill, calling it “the most radical piece of legislation” to have crossed his desk, and arguing that “good public policy requires that we enhance rather than diminish both parental authority and parental involvement with children.” Now Democrats in Congress are trying again, fashioning a child-care system as part of an enormous social-spending package. It is expected to consist of a universal pre-kindergarten programme for three- and four-year-olds and free or heavily subsidised child care for most Americans. The potential gains from more systematic support are large. But there are trade-offs around its design, too.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More

THE IDEA that the spoils of the modern economy are unfairly distributed has become part of public discourse in the rich world. One common villain is the growing class of wealth-owners living off the returns from capital rather than hard-earned wages, an explanation popularised by Thomas Piketty in his book, “Capital in the Twenty-First Century”, published in 2013. The idea has gained currency with politicians. And studying the “labour share”, the slice of national income earned by workers through wages, has become something of a cottage industry in economics.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More

GM is advising some Chevrolet Bolt owners to not park their electric cars within 50 feet of other vehicles to reduce the risk of a potential fire spreading to other cars and trucks.
“I mean, the electric car is here to stay. I predict a child born today will probably drive in a gasoline powered car about as often as you would drive in a car with a stick shift now,” said Leno.

Jay Leno gave CNBC’s “The News with Shepard Smith” an optimistic outlook when it comes to the future of electric cars, despite the latest warning from General Motors to owners of some Chevy Bolts, advising them not to park within 50 feet of other cars.
“The last days of old technology are always better than the first days of new technology, but we’re beyond the first days of new technology,” said Leno, the host of CNBC’s “Jay Leno’s Garage.” “I mean, the electric car is here to stay. I predict a child born today will probably drive in a gasoline powered car about as often as you would drive in a car with a stick shift now.”

GM’s latest warning follows the Detroit automaker recalling more than 140,000 of the EVs produced since 2016 due to the risk of batteries spontaneously catching fire from “two rare manufacturing defects.”
Leno told host Shepard Smith that, in comparison, electric car fires are less severe than fires in gas-powered cars. 
“I mean the advantage, if there is one, to an EV fire is, it doesn’t blow up,” Leno explained. “You’re in it, you smell something, there’s smoke, and then it doesn’t go up in a ball the way a gasoline car would. That’s not to say it’s not dangerous and, hopefully, they’ll fix the problem.”
“Jay Leno’s Garage” season 6 premieres Wednesday, September 22 at 10 pm ET/PT on CNBC.

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THE WORLD BANK’S Doing Business rankings, which are followed closely by leaders in China, India and elsewhere, are supposed to gauge how easy it is to do business in 190 countries. But the rankings have instead become a revealing gauge of how the World Bank itself does business under political pressure. In so doing, they have also created a dilemma for the bank’s sister institution, the IMF.In January the bank appointed a law firm to investigate allegations that the scores for China and three other countries (Azerbaijan, Saudi Arabia and the United Arab Emirates) had been altered. Its findings, released on September 16th, provide a startlingly frank, blow-by-blow account of the bank’s efforts in 2017 to engineer an improvement in China’s ranking. According to the investigators, the amendments reflected pressure from aides to Jim Yong Kim, the World Bank’s president at the time, “presumably” at his direction. And the effort was ultimately led by Kristalina Georgieva, who was then second-in-command at the bank and is now the boss of the IMF.It was an awkward time for the bank. Some of its harshest critics were in office in America’s Treasury Department, as part of President Donald Trump’s administration. Many of the bank’s biggest clients could borrow larger sums, with fewer strings attached, from China or the financial markets. And the distribution of shares and, therefore, voting rights in the bank was hopelessly outdated, failing to reflect the rise of emerging economies.Since a country’s votes in the bank are tied to its financial contributions, a solution seemed obvious. The bank should raise more capital from its members, with emerging economies contributing a larger share than in the past. But to get America and Japan to agree to that, the bank needed China to accept a smaller increase in its financial contributions (and therefore its vote share) than the country’s economic size would warrant, so that it did not become too influential. The bank’s leaders thus found themselves in a paradoxical position. They wanted to keep China happy so that it would agree to stump up less money for the bank than was merited for such a big economy.But even as the bank was losing prominence as a lender, its Doing Business rankings were becoming ever more visible, grabbing the attention of some of the world’s most powerful people. Both Vladimir Putin of Russia and Narendra Modi of India had set high-profile targets for lifting their countries in the rankings. Li Keqiang, China’s prime minister, had put a team of perhaps 40 people in place to improve China’s lowly position (78th at the time).At Mr Li’s urging, China’s reformers set about cutting red tape with some gusto. The country’s officials told World Bank staff how much they were looking forward to seeing China rise in the rankings. Sadly many of these reforms took place too late to make the cut for the Doing Business report scheduled for release in late 2017. Although China’s score had improved, it was set to fall to 85th place, because other countries did even better. (“I think I’m going to cry,” one aide to Mr Kim wrote in an email when told that China would drop.)In October 2017, after the rankings were ready for the printer, Mr Kim’s aides discussed ways to improve China’s position with the Doing Business team. Perhaps China’s score could include Macau? (But the bank had no data for the city.) Perhaps Hong Kong? (Too politically touchy.)At that point, Ms Georgieva was put in charge of the issue. According to the investigators, “a small group of Doing Business leaders”, helped by Simeon Djankov, who had created the rankings in 2003, ultimately found a way to improve China’s score on the ease of starting a business, obtaining credit and paying taxes. They decided, for example, not to count two procedures (opening a bank account and obtaining financial invoices) required to start a business. And they undid a previous correction to China’s score on the legal rights of secured creditors.How arbitrary were these tweaks? One staff member told the investigators that there was a “reasonable question” about China’s scores on these matters. And it is plausible that was what Ms Georgieva also believed. But the investigation makes clear that these tweaks were an attempt to improve China’s ranking, not an attempt to improve the bank’s method. And an internal review by the bank itself, released in December 2020, said that the tweaks were “not justified by the Doing Business methodology or by any new information provided to the Doing Business team”.The investigation’s findings pose two immediate questions: what should now happen to the rankings? And what should happen to Ms Georgieva? The fate of the Doing Business rankings has already been decided. The bank has said it will abandon the exercise. That is perhaps inevitable, given the damage to their reputation and credibility. This is not their first scandal: Paul Romer resigned as the bank’s chief economist in 2018 after saying he could not defend the integrity of the rankings. Still, the project’s demise is a pity. Ranking countries against each other was gimmicky, but it won the attention of leaders in pursuit of bragging rights. By measuring concrete regulations that governments can feasibly change, the scores helped to galvanise genuine reforms in some big economies, including China. (It is also true that some governments “gamed” the rankings, carrying out superficial reforms designed to improve their score without much improving life for businesses.)Some people see the episode as proof of “Goodhart’s law”, which states that when a measure becomes a target, it ceases to be a good measure. But the Doing Business rankings were always intended to motivate as well as measure, to change the world, not merely describe it. If these rankings had never captured the imagination of world leaders, if they had remained an obscure technical exercise, they might have been better as measures of red tape. But they would have been worse at cutting it.And what about Ms Georgieva? “I disagree fundamentally with the findings and interpretations of the investigation,” she said in a statement on September 16th, without elaborating. When she was picked to run the fund in 2019, some wondered if Ms Georgieva, a life-long technocrat, had the political nous and diplomatic finesse to handle the more prominent IMF role. Now it seems she was too diplomatic for her own good. In helping to keep China happy, she may have thought she was helping to salvage multilateralism. But critics of multilateralism will have a field day with these findings, citing them as proof that international institutions like the one she now runs cannot stand up to China. More

Stock futures were steady in overnight trading on Thursday as investors remain cautious about the month of September.
Dow futures fell 20 points. S&P 500 futures dropped 0.08% and Nasdaq 100 futures dipped 0.09%.

On Thursday, the Dow Jones Industrial Average lost 63 points, after being down as much as 274 points at its low. The S&P 500 fell 0.16%.
The Nasdaq Composite was the outperformer, rising 0.13% as Netflix, Microsoft and Amazon all closed in the green.
The Census Bureau reported Thursday that August’s retail sales increased 0.7% for the month against the Dow Jones estimate of a decline of 0.8%. However, the retail sales beat came after the initial estimate for July was revised down sharply from a month-over-month gain of 0.5% to a decline of 1.8%.
A separate economic report showed that weekly jobless claims increased to 332,000 for the week ended Sept. 11, according to the Labor Department. The Dow Jones estimate was for 320,000.
“The economy is widely thought to be slowing under the weight of the Delta variant. Combined with a bad historic September stock market seasonality and ongoing fears of inflation, has caused investors to recently turn cautious,” said Jim Paulsen, chief investment strategist for Leuthold Group. “With economic growth unexpectedly reviving again, investors are questioning whether they have been too cautious keeping a bid under the overall stock market.”

Stocks are heading into Friday with modest gains for the week. The Dow is up 0.41% and the S&P 500 is up 0.34% since Monday. The Nasdaq Composite has gained 0.44% this week.
Meanwhile, for the month, stocks are in the red. The Dow is down 1.7% in September. The S&P 500 is off by 1.1% this month but still just 1.6% from its all-time high. The Nasdaq has lost 0.5% this month.
History is also not on the market’s side as September tends to be a typically negative month for stocks. Friday begins a historically weak period for stocks as those September losses typically come in the back half of the month.
Friday marks Quadruple Witching Day, where during the final hour of stock market trading, stock index futures, stock index options, stock options, and single-stock futures expire.

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House Democrats unveiled a tax package this week that would raise $2.1 trillion over a decade from the wealthy and corporations.
The tax plan would increase the existing marriage penalty for wealthy couples, according to financial advisors.
If successful, the legislation may change how high-income couples file their taxes.

The tax package House Democrats unveiled this week would increase the so-called marriage penalty for wealthy couples.
Couples who file a joint tax return experience a marriage penalty if their income-tax bill is larger than the one they’d get filing as single taxpayers.

A penalty is more common when each spouse earns a similar income, according to the Tax Policy Center. Penalties exist in current rules, though the 2017 Republican tax law reduced their scope.
The House legislation — which raises about $2.1 trillion in taxes over a decade from corporations and the wealthy to finance an expansion of the U.S. safety net and other measures — increases the existing penalty.

The proposal would raise the top income-tax rate to 39.6% from 37%. A single filer with more than $400,000 of income in 2022 would pay that rate. However, the $450,000 income threshold for married couples filing a joint return isn’t much higher. (It’d have to be double, or $800,000, to avoid a marriage penalty in this context.)
(Currently, a single filer with more than $523,600 of income pays the top rate, compared with $628,300 for married couples.)
“There’s clearly a bigger marriage penalty,” Leon LaBrecque, an accountant and certified financial planner at Sequoia Financial Group, said of the House legislation.

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The penalty’s impact would extend beyond income tax on wages. A new 25% top federal tax rate on investment income (from appreciated stock and dividends) would also kick in at the $400,000 (singles) and $450,000 (married) levels in 2022.
“It’s not everyday Americans [who’d be affected by the change],” Paul Auslander, a CFP and the director of financial planning at ProVise Management Group, said of the income range. “It’s pretty high.”‘
Depending on the couple, the change could amount to several thousand dollars of extra tax per year, he said.
“That’s not chump change,” he said. “It’s not going to break anybody, but it’s an annoyance.”

Tax legislation

Several revisions may occur as lawmakers continue to debate the contours of the broad package, which may cost as much as $3.5 trillion.
The legislation’s success also isn’t guaranteed due to Democrats’ razor-thin margins in the House and Senate and competing visions for how the richest Americans should be taxed.
House Democrats likely established the income bands for married couples to raise more money for their agenda, Auslander said. Reducing or getting rid of the marriage penalty would mean less tax revenue.
As is, the top tax rate and income bands proposed would raise $170.5 billion over a decade, according to the Joint Committee on Taxation, which is Congress’ nonpartisan tax scorekeeper.
If the marriage penalty remains intact through the legislative process, high-income couples may change their financial plans.
For example, couples may consider filing separate tax returns or even staying single, LaBrecque said.
Filing a separate tax returns frequently results in a higher tax liability under current law, according to the Tax Policy Center.
However, the House legislation may not make this route a money-saver for many people — couples filing separate returns would hit the top 39.6% bracket after $250,000 of income.

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IN 2010, WHEN President Barack Obama welcomed his Chinese counterpart to a summit in Washington, DC, he greeted him with a handshake and a swift, shallow dip of the head. The image of America’s president bowing before China made an arresting cover photo for the book “Eclipse”, published the following year. The book, written by Arvind Subramanian of the Peterson Institute for International Economics, a Washington-based think-tank, predicted that China would soon come to dominate the world economy and that America could do precious little about it. Your correspondent once included the cover image in a presentation at the Central Party School in Beijing. It caused quite a frisson.To gauge a country’s economic “dominance” Mr Subramanian combined its share of world trade, net capital exports and global GDP (measured at both market exchange rates and purchasing-power parities, which try to correct for international differences in the price of similar goods). He gave each attribute a weight loosely based on the IMF’s formula for allocating votes to its members. His index, he argued, successfully captured Britain’s economic hegemony in 1870, its rivalry with Germany in 1913 and its eclipse by America in the subsequent decade.According to this measure, Mr Subramanian predicted, China would become the world’s most dominant economy by 2020. In the ten years since that forecast, China has faced a trade war with America, its growth has slowed and its currency has suffered bouts of volatility, obliging it to tighten controls on capital outflows. Yet Mr Subramanian’s central prediction has come true. Based on the book’s original formula, China became the world’s most dominant economy last year (see chart). Its growth slowdown has been no worse (so far) than Mr Subramanian expected and the covid-19 pandemic has helped increase its share of global trade.Mr Subramanian successfully predicted how his own index would evolve. But does his index successfully capture economic dominance? Other authors have included wealth, GDP per person and other proxies for economic sophistication, as well as scale. (Our favourite index of a country’s global influence, put together by Francesc Pujol of the University of Navarra, counts the number of times a country appears in the charts of The Economist.) These measures give America a bigger edge.For the sake of tractability, Mr Subramanian’s measure gives every dollar of exports equal weight. But some of America’s high-tech exports appear to give it an economic “chokehold” over China that is worth more than their market value. Mr Subramanian thought that China’s growing share of GDP and trade could soon elevate its currency into a rival to the dollar. But China’s yuan has made little headway. That is partly because China has tightened capital controls, a possibility that Mr Subramanian acknowledged. But he thought that if China clung to such controls it would be to keep the yuan cheap (by preventing capital inflows) not to prop the yuan up (by deterring capital outflows). Still, given the sorry record of most economic predictions, the book’s author deserves a handshake and a bow. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “The Thales of economics” More

GARY GENSLER’S students at MIT Sloan were an appreciative bunch. Their nominations secured him the business school’s “Outstanding Teacher” award for the 2018-19 academic year. Now that he is the chairman of the Securities and Exchange Commission (SEC), America’s main markets watchdog, his constituents are rather more unruly. Finance has been upended by an explosion of raucous innovation, and Mr Gensler has to work out how, and to what extent, to police it all. Forget diligent undergraduates; it is rather like trying to run the world’s largest, noisiest kindergarten.The drive for more adult supervision is already under way in crypto. The SEC recently threatened to sue Coinbase, a large cryptocurrency exchange, if it launches a lending product without first registering it as a security. And this week the regulator extracted $539m from three media firms charged with illegal offerings of stocks and digital assets.Crypto-believers may have expected a friendlier stance from a man whose courses at MIT included one on the uses of blockchain technology. But since taking the SEC’s reins Mr Gensler has been at pains to point out that, while he is “neutral” on technology, he is anything but when it comes to investor protection and market stability. And that means beefing up regulation of the $2.2trn crypto market, which, he told a Senate committee this week, is a “Wild West…rife with fraud, scams and abuse”.His agenda stretches beyond the seething cryptoverse. He is also warily eyeing other newfangled corners of finance, from trading apps like Robinhood that use “digital engagement practices” to encourage retail punters to trade more often, to special-purpose acquisition companies (SPACs) that push the envelope of what securities laws allow (an early victim was SPAC-king Bill Ackman’s complex plan to invest in Universal Music Group). Other targets include the kinds of derivatives that blew up Archegos, a family office, and the shell-company structures used by many Chinese firms that list in America.For all the focus on finance’s cutting edge, Mr Gensler’s SEC may end up having just as big an impact on more established markets. He thinks stock trading needs an overhaul; too much flows to “dark”, off-exchange venues, where small investors can more easily be stiffed. They may also, he suspects, be short-changed by potential conflicts of interest such as the “payment for order flow” that brokers get for routing trades to particular marketmakers. He wants to force corporate disclosure of everything from climate risks to how firms treat their workers.Quite a to-do list, then; policy reviews are under way in at least 50 areas. And quite a change from President Donald Trump’s era, when the commission seemed happy to drag its feet on implementing post-financial-crisis reforms.The obvious question is whether Mr Gensler is biting off more than he can chew. His background, equal parts poacher and gamekeeper, should help him. After 18 years at Goldman Sachs, the last ten as a partner, he worked in the Treasury and helped write the Sarbanes-Oxley reforms after the implosion of Enron, an energy firm, in 2001. As head of the Commodity Futures Trading Commission (CFTC), which regulates derivatives, he saw off an attack from the giant over-the-counter swaps industry, forcing it onto more highly regulated platforms.Being a good communicator should also help. Mr Gensler understands that winning the argument means boiling the message down to simple analogies that most punters (and senators) can grasp. Under him, the SEC is even using social media to good effect. When the boss of Coinbase professed shock that a lending product could be classed as a security, the commission archly tweeted a 30-second guide to how bonds work.Good one. But Mr Gensler can expect fierce lobbying against more red tape. He may also have to fight turf wars with other regulators; the CFTC wants a piece of the action in digital currencies. And then there are the politicians. Regulation-friendly Democrats have the upper hand in Congress but some people are queasy about a big expansion of the SEC’s authority, given its patchy record: think of all the scandals, from Enron to Bernie Madoff, unearthed not by the regulator but by outside sleuths. Mr Gensler also needs more money. At $2bn, his budget is smaller than JPMorgan Chase’s annual spending on marketing. But the increase pencilled in for 2022 is just 5%. Mr Gensler has big ambitions. His problem may be finding the big bucks to realise them.This article appeared in the Finance & economics section of the print edition under the headline “The SEC’s modest mission” More