Michael Spence writes:  On his recent book tour, former Federal Reserve Chairman Ben Bernanke stated that low long-term interest rates are not the Fed’s doing. Low rates result from a shortage of good capital projects. If there were good investment projects, he explained, capital would flow and interest rates would rise. Mr. Bernanke insists that the absence of compelling investment opportunities in the real economy justifies continued, highly accommodative monetary policy.

That may well be true according to economic textbooks. But textbooks presume the normal conduct of policy and that the prices of financial assets like stocks and bonds are broadly consistent with expectations for the real economy. Nothing could be further from the truth in the current recovery.

During the past five years earnings of the S&P 500 have grown about 6.9% annually. As the table nearby shows the current profit picture pales in comparison to prior economic expansions, in which earnings grew significantly faster. Moreover, only about half of the profit improvement in the current period is from business operations; the balance of earnings-per-share gains arose from record levels of share buybacks. So the quality of earnings is as deficient as its quantity. The current economic expansion is also unusual because the stock market and other financial assets have boomed in spite of relatively muted profit gains.

What explains the apparent divergence between earnings and asset prices? The unusual conduct of monetary policy.

Extremely accommodative monetary policy, including the purchase of about $3 trillion in Treasurys and mortgage-backed securities during three rounds of “quantitative easing” (QE), pushed down long-term yields and boosted the value of risk-assets. Higher stock prices were supposed to drive business confidence and higher capital expenditures, which were supposed to result in higher wages and strong consumption. Would it were so.

Business investment in the real economy is weak. While U.S. gross domestic product rose 8.7% from late 2007 through 2014, gross private investment was a mere 4.3% higher. Growth in nonresidential fixed investment remains substantially lower than the last six postrecession expansions. In 2014, S&P 500 companies spent considerably more of their operating cash flow on financially engineered buybacks than real capital expenditures for the first time since 2007. During the precrisis period, by contrast, corporate spending on real assets averaged 10 percentage points higher than on financial assets.

Many believe that today’s lack of capital investment stems from a shortfall of global demand. Output gaps can have a dampening effect on investment. But the demand that drives capital investment is future demand. Efforts by the Fed to fill near-term shortfalls in demand through QE and so-called forward guidance have shown limited and diminishing signs of success. And policy makers refuse to tackle structural, supply-side impediments to investment growth, including fundamental tax reform.

Can it be that QE has redirected capital from the real domestic economy to financial assets at home and abroad. In this environment, it is hard to criticize companies that choose “shareholder friendly” share buybacks over investment in a new factory. But public policy shouldn’t bias investments to paper assets over investments in the real economy.

How has monetary policy created such a divergence between real and financial assets?

First, corporate decision-makers can’t be certain about the consequences of QE’s unwinding on the real economy. The resulting risk-aversion translates into a corporate preference for shorter-term commitments—that is, for financial assets.

Second, financial assets are considerably more liquid than real assets.

Third, QE reduces volatility in the financial markets, not the real economy. By purchasing long-term securities, the Fed removes significant market volatility from stocks and bonds.

Fourth, QE’s efficacy in bolstering asset prices may arise less from the policy’s actual operations than its signaling effect. Mr. Bernanke himself has said that QE “works in practice, just not in theory.”

For real assets, the benefits of QE are far less obvious—and the results far less impressive.

Inadequate capital investment means that labor is also underutilized. The impact of low capital investment is apparent in the weak productivity statistics.

These trends, if not reversed, threaten to harm the U.S. economy’s growth prospects. We recommend a change in course. Increased investment in real assets is essential to make the economic expansion durable.

The Rocky Road to Globalization.

The EU, with a single currency and a single market is making moves to make tax treatment more uniform.  This may be a mini model for a global response to the current issues of national taxation while doing business globally.

Eliza Ferreira, the co-rapporteur of a special committee on tax rulings,  says tax harmonization is not on the agenda but “you can’t leave the EU member states complete freedom in a single market and single currency.” She added that the need for action is urgent because the erosion of Europe’s tax base is “as bad as the [situation caused by] banks a few years ago,” and creates an unstable political situation. On the state aid tax cases pursued by Competition Commissioner Margrethe Vestager: “We are really supporting her. It was right for us to put pressure on the Commission. This is just the top of the iceberg.”

“The problems of Luxembourg are a generalized practice, it is not just Luxembourg … It is a game that is not controlled… We end up with multinationals paying almost no tax while the vulnerable go through very harsh austerity, as with SMEs who cannot benefit from all these mechanisms. So our appeal is for a new approach; for Parliament and Commission to make the Council move.”

The committee is expected to call for new impetus to deliver the CCCTB (Common Consolidated Corporate Tax Base) proposed by the Commission in 2011. They are not interested in tax rates per se. “The levels don’t really matter, what matters is how you calculate it and what the exemptions are,” Ferreira says. Finally, “Tax reporting needs to include how much is actually paid,” and the EU must define what is a tax haven, or at least lay out criteria for national governments to apply.

Leaders from several European countries are holding an emergency meeting to try to close sharp divisions on the migrant crisis in the Balkans.

A draft statement calls on countries to stop waving through migrants without the agreement of their neighbours.

Slovenian PM Miro Cerar warned that the EU would “start falling apart” without concrete action on the crisis.

But his Serbian counterpart Aleksandar Vucic played down the prospects of a deal.

Ten EU and three non-EU states are taking part but the absence of Turkey at the summit has been questioned.

“Today the discussion will be among the countries along the corridor of the refugee flows,” said Greek Prime Minister Alexis Tsipras.

“But everybody knows at the end of the corridor there is an entrance.”

The draft calls for the “gradual and controlled” movement of people through the migration route.

It also proposes to bolster EU patrols at Greece’s borders and to send 400 extra guards to Slovenia.

Germany Chancellor Angela Merkel said the refugee crisis could not be solved without the help of Turkey.

Hungary closed its border with Croatia last week. As a result, Slovenia saw 58,000 arrivals in the week leading up to Saturday, and many people are waiting in wet and cold conditions.

“We will not be able to endure this for weeks if we do not get help,” said Mr Cerar, arriving for the summit.

The Slovenian government has accused Croatia of deliberately dumping thousands of migrants on the border.

Croatia says it has no choice because Slovenia is allowing far fewer into the country than it should be.

If no agreement is reached, he added, “we will soon see families in cold rivers in the Balkans perish miserably”.

Fears of Germany and Austria closing their own borders have led Bulgaria, Romania and Serbia to threaten to do so.

Bulgarian Prime Minister Boyko Borisov said the three countries would not “become buffer zones”.

The International Organization for Migration said that more than 9,000 migrants arrived in Greece every day last week – the highest rate so far this year.

Most of the migrants – including many refugees from the conflicts in Syria, Iraq and Afghanistan – want to reach Germany to claim asylum.

Germany says it expects to take in 800,000 asylum seekers this year.

Carbon rule for power plants has the coal interests fighting hard.

The publication of the EPA’s carbon rule for power plants has prompted a flurry of legal and legislative action, ushering in a lengthy battle over the future of the Obama administration’s key climate change initiative.

More than two dozen states and a slew of interest groups and companies sued over the Clean Power Plan.

Leading state attorneys general called the rule an illegal expansion of federal power that they said will have a dramatic impact on electricity pricing, grid reliability and jobs.

On Capitol Hill, Republicans geared up for their own attempt at repealing the rule, perhaps forcing a veto from President Obama.

The Clean Power Plan is intended to cut carbon emissions from the power sector by 32 percent over the next 15 years by assigning carbon targets to states and asking them to find ways to hit them.

In a statement, McConnell repeated his long-held argument against the regulations: that they will hurt his state’s coal industry by forcing a transition to cleaner energy.

“Here’s what is lost in this administration’s crusade for ideological purity: the livelihoods of our coal miners and their families,” he said in a statement.

“I have vowed to do all I can to fight back against this administration on behalf of the thousands of Kentucky coal miners and their families, and this CRA is another tool in that battle. The CRAs that we will file will allow Congress the ability to fight these anti-coal regulations.”

On the legal front, more than half the states affected by the Clean Power Plan have filed lawsuits against it.

West Virginia Attorney General Patrick Morrisey, a Republican, said he hopes a federal court will block implementation of the rule while considering the broader legal case against it.

Morrisey said the EPA doesn’t have the power under to regulate carbon emissions from power plants in the way it has proposed. He equated the rule to a cap-and-trade system, something Congress considered but rejected during the early years of Obama’s presidency, and contended the EPA “cannot use the regulatory apparatus of the executive branch to push policies the Congress does not approve.”

EPA officials and the Obama administration were quick to defend the rule on Friday. In a blog post detailing the Clean Power Plan’s legality and scientific basis, EPA Administrator Gina McCarthy said the regulations are on strong legal ground.

“The plan is fully consistent with the Clean Air Act, and relies on the same time-tested state-federal partnership that, since 1970, has reduced harmful air pollution by 70 percent, while the U.S. economy has tripled,” she wrote.

White House spokesman Eric Schultz said he wasn’t surprised to see Republican critics “rush to the courts to try and prevent something they weren’t able to do legislatively,” and dismissed their chances of success.

Obama is certain to get support from some outside sources. A group of 15 Democratic attorneys general led by New York’s Eric Schneiderman said Friday they would file motions supporting the rule come next week.

Green groups are primed to do the same.  “The Clean Power Plan will have a powerful army of defenders as well, in this court battle,” said David Doniger, director and senior attorney for the climate and clean air program at the Natural Resources Defense Council.

Christine Lagarde said recently:  “China is on the way to a new growth model, and the US monetary policy probably goes in a new direction. These are necessary and healthy transitions. But they affect other countries around the world through trade, exchange rates, by investment markets and capital flows.”  Or spillovers.

The finance ministers of the leading industrial and emerging countries (G20) are developing a comprehensive action plan to commit 100 billion dollars envisaged by 2020 annually to public and private capital to combat and adapt to climate change.  According to the OECD Interim Report: 60 percent of this money has been pledged.

The Climate Fund was formed to benefit mainly developing and emerging countries, and is considered fundamental to finalize a global climate treaty with greenhouse gas reduction commitments by 190 countries in December in Paris.  Without action “we will transform ourselves into chicken and we are all fried, grilled, toasted and roasted,” Lagarde warned.