Friday's Top 10: The taxes that enslave Europeans, Gothenburg's 6 hour working day on ice, the FIFA monopoly, global warming to eliminate red hair? Dilbert and more

Today's Top 10 is a guest post from Oliver Hartwich, the executive director of the New Zealand Initiative.

As always, we welcome your additions in the comment stream below or via email to david.chaston@interest.co.nz.

And if you're interested in contributing the occasional Top 10 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 10s here.

1. Economic forecasting explained
Economic forecasts were, of course, only invented to make weather forecasters look better.

And, as Churchill said, if you ask two economists you get two opinions, unless one of them was Keynes in which case you get three.

With no shortage of jokes about economists and their ability to foresee the future, Callam Pickering asks why the profession does not do better – and why forecasts are still useful.

Forecasting is a necessary evil when dealing with any economy, government or business. Central banks release their forecasts, typically on a quarterly basis, while retail and investment banks adapt their forecasts from week to week. Government budgets dominate the news headlines, markets compare new information against their expectations and almost everyone has an opinion on what the Reserve Bank will do when it next meets.

But what do we really know about the formation of our forecasts? And if we accept that our forecasts are rubbish, does it really matter?

The simple truth is that our forecasts will rarely be accurate – but that doesn’t necessarily mean they are useless. An economist might argue that as long as our forecast errors are unbiased -- this implies that they are not consistently or predictably optimistic or pessimistic – then they can still be used to inform discussion, decision-making and policy formation.

2. NZ gaining creditworthiness – but is it news?
The good news about the health of the New Zealand economy is reaching international credit ratings agencies. Fitch just lifted NZ’s outlook from stable to positive.

Though that is obviously welcome, the question is whether this is news.

That New Zealand’s outlook is positive should not surprise anyone who has read the business pages over the past year. Will credit ratings agencies ever tell us anything we don’t already know?

Credit ratings agency Fitch revised New Zealand’s rating outlook from stable to positive overnight. The positive outlook indicates the likelihood of New Zealand’s credit rating strengthening over the next year or two, although it is not a guarantee a change will occur.

Fitch said the revision reflected a strengthening the resilience of New Zealand’s sovereign credit profile due to fiscal consolidation. Vulnerabilities remained however, mainly due to high net external debt and strong commodity dependence.

“New Zealand remains heavily exposed to developments elsewhere, notably in China and Australia,” it said.

3. The taxes that enslave Europeans
I just came across an interesting research note from the German Taxpayers’ Federation. It compared the costs to employ someone on the national average wage to the take-home pay for this person, and the Federation did this comparison for all OECD countries.

The results were so extraordinary that I wrote about it in my column for the Australian Business Spectator. It’s grim reading for any European but largely a good news story for Australians and New Zealanders. We still get to keep most of what we earn.

For European taxpayers, the wedge between gross and net salaries is certainly unpleasant. However, it should be reason for even greater concern. In Europe’s ageing societies, the contributions to fund pensions and health care are likely to increase further in the future. At the same time, globalisation will make it harder to justify Europe’s extraordinarily high labour costs.

For future Tax Freedom Days in Germany and the rest of Europe, this is bad news. It will require some tough decisions to even keep the day where it is now.

For Australians and New Zealanders, meanwhile, there may be some consolation in looking at Europe. We may certainly feel overtaxed at times but at least compared to European levels, we are in the fortunate position of mainly working for ourselves and not for the government. Let’s keep it that way.

4. The end of QE for the US
At least in the United States, quantitative easing may soon come to an end. As the Daily Telegraph reports, the minutes of the Federal Reserve’s Open Market Committee show that it expects that QE3 will run out in October.

Whether that is the end of the story remains to be seen. Tapering QE has been on the agenda for quite a while. Time will tell whether this time the Fed’s optimism is justified.

Last month, the Fed sharply downgraded its expectations for America’s economic growth in 2014. The FOMC believes the world’s largest economy will grow by between 2.1pc and 2.3pc this year, down from earlier forecasts of 2.9pc.

Policymakers said the outlook remained positive after the big winter slowdown. Most participants said they expected growth in the world’s biggest economy to “pick up notably in the second half of this year and remain in 2015 and 2016 above their estimates of the longer-run normal rate of output growth”.

The minutes added: “Participants generally judged that real GDP growth in the first half of this year was held down by transitory factors depressing output early in the year, and they pointed to a number of factors that they expected would continue to contribute to a pickup in economic growth later this year and next, including rising household net worth, diminished restraint from fiscal policy, improving labor market conditions, and highly accommodative monetary policy.”

5. Capitalism does not equal inequality
UK economist Paul Ormerod just had a good piece in City AM. He explains why Thomas Piketty’s claims about the link between capitalism and inequality do not exist.

The devil is in the detail of his work – and in Piketty’s own data. Apparently, sometimes it takes an economist trained in Marxism to refute neo-Marxist ideas.

A devastating theoretical and empirical critique of Piketty is made in a recent paper by Bob Rowthorn, former head of the economics department at Cambridge University. In his younger years, Rowthorn was an expert in Marxist economics, and so is arguably ideally placed to appraise Piketty’s work. Piketty shows that there has indeed been a sharp rise in the ratio of wealth to income in the early 21st century – the ratio has risen to around 5 or 6 for most rich countries, compared to around 2 or 3 in the 1950s and 1960s.

Rowthorn points out, using Piketty’s own data, that the whole of this increase is due to capital gains in both housing and the equity markets. In real terms, the ratio has been constant in Europe, and has actually fallen in America. This is highly relevant. A crucial part of Piketty’s argument about the future is that he believes that the rate of economic growth will be low. But if growth is low over many decades, it is very hard to believe that there will not be a reversal of the increases in real estate and share prices, and Piketty’s measure of the ratio of wealth to income will fall.

6. Soccer rules the world
The FIFA World Cup is a good time to reflect on the global importance of soccer (or football, whatever you prefer to call it).

As it turns out, New Zealand belongs to a small minority of countries in which soccer is not the most popular sport. With such a dominant position in the sports business, is it any wonder that soccer’s governing body FIFA behaves like a textbook monopolist?

Soccer supremacy is the big story. In virtually all of Europe, South America, Africa, and the Middle East, soccer is king. Ditto most of Asia and Central America. If it weren’t for people’s weird tastes in China and some former British colonies, soccer would basically be a universal sport. As of right now, it’s pretty damn close.

7. Six hours not enough to work it out
The Swedish city of Gothenburg and its left-leaning council have put plans on hold to introduce a six-hour working day.

The policy was meant to cut down on sick leave, boost efficiency, and ultimately save Sweden money. Municipal staff in Gothenburg were supposed to be the guinea pigs in this experiment by being put on six-hour workdays with full pay.

As it turned out, even the proponents of this scheme cannot figure out how to make it work. Perhaps they need more time to work it out?

The city planned to start experimenting with shorter workdays this summer, but announced on Monday that would not be an option. Several obstacles have arisen, including selecting a researcher who can follow the project without clashing with city procurement rules.

“We think it’s time to give this a real shot in Sweden,” Mats Pilhem, Left Party deputy mayor of Gothenburg, told The Local in April. Pilhem expressed hopes that the experiment would begin on July 1st, but admitted on Monday that he had been overly optimistic. “That was probably very optimistic of me,” Pilhem confessed to SVT. “I didn’t realize that we would have so many problems to address.” Pilhem promised the test would continue, but said it’s likely it won’t be under way for many months.

8. Will investment get Europe to grow again?
The euro crisis may no longer look so threatening. (Editor's note; this column was written before the overnight news featuring in today's 90 at 9). But still Europe has not managed to find a way back to economic growth. Some economists believe they have found a way to change this.

No, not through painful economic reforms, labour market deregulation or anything unpopular. A giant investment fund is supposed to do the trick, as Der Spiegel reports.

Among economists, Marcel Fratzscher is considered to be particularly creative. As head of the German Institute for Economic Research (DIW), Fratzscher publishes more than almost any other economist in the German-speaking world and even politicians come to him for expertise. Indeed, he has been tasked by Economics Minister Sigmar Gabriel -- who is also German vice chancellor and head of the center-left Social Democratic Party -- with heading up a working group to examine how investments in Germany can be boosted.

Fratzscher’s report, to be released on Wednesday, will likely garner the economist even more high-level attention. The study shows how Europe might be able to mobilize the kind of investment it badly needs, despite empty state coffers and the shackles imposed by the debt and deficit limitations of the European Stability Pact.

9. Making cities mobile and affordable
For the past couple of years, The New Zealand Initiative has contributed to debates on housing, local government and town planning. That is why we are excited to host a leading international expert on cities later this month, and for that matter a town planner who has become increasingly critical of his own profession.

The events with him in Auckland and Christchurch were booked out within days but if you want to hear a radically different perspective on the future of our cities, there are still limited tickets for Bertaud’s public lecture in Wellington.

In recent decades, urban planners have been inventing all sorts of abstract objectives to justify their plans for our future cities: smart growth, liveability, and sustainability are among the most recent fads. There is nothing wrong, of course, for a city to be smart, liveable, or sustainable.

But for some reason these vague and benign sounding objectives often become a proxy for imposing planning regulations that severely limit the supply of land, resulting in ever higher housing prices. They also reduce the ability of cities to cope with their residents’ transport needs.

New York University senior scholar Alain Bertaud, himself a former principal urban planner at the World Bank, argues that it is time for planners to think again. They need to abandon abstract objectives and focus their efforts on just two measurable outcomes: citizens’ mobility and housing affordability.

10. And finally: Red alert for global warming
Over the past years, we have learnt that climate change can have many different and sometimes contradictory effects: more wind or less wind; more precipitation or less precipitation; more arctic ice or less arctic ice.

If none of this convinced you of the dangers of global warming, maybe new research from Scotland will. Scottish researchers are convinced that higher temperatures will eliminate the gene responsible for red hair.

The red hair gene could be on the way out as it is thought to be a response to cloudy weather in Scotland, something which the country could see less and less of. A gene mutation that yields red hair and pale skin which is more sensitive to light leaves DNA in skill cells more prone to sun damage and cancer, and if predictions of rising temperatures are correct evolution might cause it to regress.

Dr Alistair Moffat, managing director of Galashiels-based ScotlandsDNA, said: “We think red hair in Scotland, Ireland and in the North of England is adaption to the climate. “I think the reason for light skin and red hair is that we do not get enough sun and we have to get all the Vitamin D we can. If the climate is changing and it is to become more cloudy or less cloudy then this will affect the gene. If it was to get less cloudy and there was more sun, then yes, there would be fewer people carrying the gene.”