Raising productivity is a big potential source of economic growth in China. But it’s also a potential source of layoffs and uncomfortable societal changes.

The McKinsey China report, released last month, is the latest in a series of productivity studies that MGI, the consulting firm’s research arm, has been producing since the early 1990s. The first ones showed that German and Japanese employment-and-growth/service-sector-productivity-and-international-competitiveness were on the whole far less productive than their U.S. counterparts.

A worker in the highly protected and fragmented food-processing industry — which employs more workers than the auto, computer, consumer-electronics and machine-tool industries combined — produces $39 worth of food in an hour, compared with an American counterpart’s $119. Productivity gains have been the main driver of rising living standards in country after country. That was the case in Japan, too, but spectacular productivity growth in a few key industries in the 1970s and 1980s failed to spread to the rest of the economy and eventually slowed to a near halt even in those industries.

There are some Chinese companies with productivity near rich-country levels, and many that lag dramatically. But the stars and the laggards aren’t concentrated in particular industries as in Japan. “In every sector there are leaders that achieve global competitiveness and yet there is also a long tail,” emailed Shanghai-based McKinsey senior partner and MGI director Jonathan Woetzel, who worked on both the China productivity report and the 2015 Japan one.

Woetzel thinks this is a sign that China may find it easier to raise productivity than Japan did. All it will take is more companies emulating the industry leaders through digitization, globalization, lean production, automation — and maybe even some things that don’t end in -ion.

What could keep that from happening? Well, China’s banks have kept a lot of the productivity laggards in business by continuing to lend to them. And it’s China’s government that controls the biggest banks, as well as a lot of the low-productivity companies they lend to.

Chinese President Xi Jinping actually talked about reforming these state-owned enterprises.

In some ways China’s leaders seem more willing than Japan’s to accept the upheaval that often comes with productivity gains. They are unwilling, however, to cede control of the economy. And that may be what keeps them from realizing their $5 trillion opportunity.

Anat Admati argues:  We examine the pervasive view that ‘equity is expensive, which leads to claims that high capital requirements are costly for society and would affect credit markets adversely.

We find that arguments made to support this view are fallacious, irrelevant to the policy debate by confusing private and social costs, or very weak. For example, the return on equity contains a risk premium that must go down if banks have more equity. It is thus incorrect to assume that the required return on equity remains fixed as capital requirements increase. It is also incorrect to translate higher taxes paid by banks to a social cost. Policies that subsidize debt and indirectly penalize equity through taxes and implicit guarantees are distortive. And while debt’s informational insensitivity may provide valuable liquidity, increased capital (and reduced leverage) can enhance this benefit. Finally, suggestions that high leverage serves a necessary disciplining role are based on inadequate theory lacking empirical support.

We conclude that bank equity is not socially expensive, and that high leverage at the levels allowed, for example, by the Basel III agreement is not necessary for banks to perform all their socially valuable functions and likely makes banking inefficient. Better capitalized banks suffer fewer distortions in lending decisions and would perform better. The fact that banks choose high leverage does not imply that this is socially optimal. Except for government subsidies and viewed from an ex ante perspective, high leverage may not even be privately optimal for banks.

Setting equity requirements significantly higher than the levels currently proposed would entail large social benefits and minimal, if any, social costs. Approaches based on equity dominate alternatives, including contingent capital. To achieve better capitalization quickly and efficiently and prevent disruption to lending, regulators must actively control equity payouts and issuance. If remaining challenges are addressed, capital regulation can be a powerful tool for enhancing the role of banks in the economy.

Hundreds of journalists around the world pored over the 11.5 million files leaked last year by an anonymous source that reveal how the rich and powerful in numerous countries use tax havens to hide their wealth. The files were leaked from one of the world’s most secretive offshore companies, Mossack Fonseca, a law firm based in Panama. They were obtained from an anonymous source by the German newspaper Süddeutsche Zeitung, who shared them with the International Consortium of Investigative Journalists. The collaboration, which did not include The New York Times, had at its center,  Frederik Obermaier, an investigative reporter at Süddeutsche Zeitung, which helped publish the Panama Papers, and Michael Hudson, senior editor at the International Consortium of Investigative Journalists.

Emails show Clinton State Department pushed Panama pact [amid] warnings it would help the rich hide money.  The Panama FTA pushed for by Obama and Clinton, watchdog groups said, effectively barred the United States from cracking down on questionable activities. Instead of requiring concessions of the Panamanian government on banking rules and regulations, combating tax haven abuse in Panama could violate the agreement. Should the U.S. embark on such an endeavor, it could be exposed to fines from international authorities.

The United States seems, in many ways, to be working at cross purposes. The U.S. Justice Department has gone after Swiss banks in a big way, gotten huge settlements with some of the biggest banks, and even some of the smaller Swiss banks, and put pressure, but there are many other examples of the United States either having policies which encourage money being moved around secretly or where we’re turning a blind eye. You know, there are states like Delaware and Nevada where there’s just as much secrecy, just as much privacy; if you want to get a company, if you want to have a shell company and not have your name publicly attached to it, you can do that.

India turns up in the context of dozens of very, very interesting cases, for example, where our colleague, Ritu Sarin, specialized on. And what she found that was amazing, it was tracks leading to prominent politicians.

The democratically elected president was impeached despite no allegations of personal corruption — by politicians who are knee-deep in bribery and kickback scandals.

Rousseff has been accused of ‘pedalling’, the illegal delay of re-payments to state banks) to mask public debt.

From the start of the campaign to impeach Brazil’s democratically elected President Dilma Rousseff,  The Associated Press reported:  “Independent auditors hired by Brazil’s Senate said in a report released Monday that suspended President Dilma Rousseff didn’t engage in the creative accounting she was charged with at her impeachment trial.” In other words, the Senate’s own objective experts gutted the primary claim as to why impeachment was something other than a coup.

The report did not fully exonerate Dilma, finding that she did open lines of credit without congressional approval, part of the impeachment case. But it was the pedaladas charge that did creative accounting that dominated the impeachment debate.

The primary pretext used to impeach her has just been debunked by the Senate’s own independent expert report. The corruption-plagued man they installed in her place — who currently has a 70 percent disapproval rating, and whom 60 percent of the country wants impeached — is now secretly meeting with the very judges whose supposed independence, credibility, and integrity were the prime argument against calling this a “coup,” all while he plots to save his bribery-enriched fellow party member. And while all this happens, they are blithely proceeding to impose an agenda of austerity and privatization that is undemocratic.

Whatever the motives were for getting rid of Dilma, illegality and corruption plainly had nothing to do with it. Just look at this week’s Senate report, or the face of the person they’ve installed, to see how true that is.

If the world economy tanks, the West may be less inclined to add to its economic problems by pursuing confrontation with the People’s Republic of China (PRC) in the South China Sea. 

The PRC will also derive some consolation from the outsized horror that neo-liberal globalists have expressed at the excesses of direct democracy as displayed in the referendum: “emotional, bigoted, low-information voters” delivering “catastrophic” outcomes against the earnest but unheeded advice of their intellectual and moral betters.

The practical consequences of Brexit to the PRC are probably more disadvantageous.

The PRC had made a sizable investment of time, effort, political capital and who knows what combination of behind the scenes arm twisting & enticements to get a ride for Xi Jinping in the royal coach with Queen Elizabeth. With Cameron out that plan will need some re-thinking.  How much actual reworking is needed depends on the ability of Europhiles in the UK to turn “Brexit” into “Brexit-Lite” or even, with apologies to Sartre, “No Brexit.”

Beyond the sunk costs of its UK investment, the PRC leadership apparently regards the travails of the EU with some uneasy sympathy and fear of democratic/nationalist contagion.

The specter of regional political and economic disintegration, with indications that Brexit may spark EU-friendly secession movements by Scotland and Northern Ireland and even trigger a rush to the exits by disgruntled EU member states on the Continent is disconcerting to say the least. 

The main bits are Han, Manchurian, Mongolian, Uyghur, Zhuang, Yi, Tujia, & Hui.  Everybody’s favorite aggrieved PRC minority, the Tibetans, are around 9^th on the list, with a population of about 5 million.  In the PRC era, India has continually entertained hard-liner plans to wrong foot China by encouraging Tibetan separatist movements. 

Today, there is increasing enthusiasm for playing the nationalities card as a weapon against PRC “assertiveness.” India hawks talk about putting both Tibet and Xinjiang in play by providing material and moral support to separatist movements. Hong Kong self-determination and Taiwan independence are well on their way to becoming default options for globally-minded liberals. 

Keeping together a multi-national empire in the modern age, in other words, is not easy.  Belt-tightening and testicle-squeezing-inclined German central bankers yielded youth unemployment rates of up to 50% in peripheral countries like Spain and Greece instead of EU-wide economic nirvana.

Open dysfunction in Europe, at the very heart of the globalist regime, might make things harder for the alliance of neo-liberal and neo-conservative strategists now constructing a “the rules-based liberal international order” and “revisionist authoritarianism.” 

Call it “reshoring,” or “insourcing” if you prefer. By any name, a significant movement of manufacturing back to U.S. shores may be exactly what the US economy needs. Factory movement overseas has opened a hole in the American job market that nothing else can truly fill, a point stressed in blue-collar populist appeals from both political parties.

The reshoring movement is, by definition, a fusion of politics and economics.   Industrial giants will not move operations back to American soil if doing so makes no sense from a financial standpoint. Given the expense involved in relocating factories, some of the gloomier analysts believe decades of movement overseas might be irreversible. Every business cost is ultimately passed along to consumers, whose willingness to pay significantly more for goods with a “Made in America” label has always been greater in theory than in practice.

However, government policies were a big part of the reason offshoring happened, and wise policy can set the economic conditions that make bringing capital back home attractive. Naturally, after agreeing that America wants manufacturing to come home, candidates from different parties have dramatically different ideas about what those policies would look like.

While a growing number of companies are returning to the United States to do their manufacturing, the trend is smaller and less significant to the economy than it appears. The number of companies bringing operations home is actually quite modest.

Manufacturing jobs coming home are still exceeded by jobs heading overseas.

Certain industries have been especially enthusiastic about bringing their factories home, leading to big predictions about a broad-based reshoring “movement” that has yet to begin. One notable example is the apparel industry. Brooks Brothers, which has increased hiring at new and upgraded factories in the U.S. over the past decade while steadily increasing sales, is cited as a standout of reshoring.

The reasons for the return of apparel manufacturing, and their policy implications, are interesting. Every industry with positive movement on reshoring mentions lower energy costs.  Reshoring companies also routinely cite increased wages in China as a reason American labor has become more competitive, so artificially increasing labor costs with more taxes, more mandatory benefits, and an increased minimum wage would be dangerous.

Garment manufacturers additionally describe the importance of remaining flexible in their industry, asserting that domestic factories make it possible to produce smaller product runs and reduce the amount of excess inventory that ends up on clearance racks… or gear up rapidly for high-production runs of popular items, as needed. The short turnaround time from design to manufacture made possible by domestic manufacturing is also highly desirable for the trend-conscious fashion industry.

Those virtues might be difficult to sell to industries that don’t place such a high value on flexible manufacturing, but one other appealing aspect of onshore manufacturing mentioned by Forbes is universally intriguing: keeping factories in the U.S. makes it possible for businesses to start smaller. A certain magnitude of sales is needed for the cost benefits of overseas manufacturing to kick in.  Make small business entrepreneurship easier to increase the demand for small-scale onshore manufacturing.

British Prime Minister David Cameron said on Tuesday his last EU summit took place in a mood of “sadness and regret” about his country’s decision to leave the European Union in a referendum last week.

“The tone of the meeting was of sadness and regret. Our partners were very much sad that we’ve decided to leave the union,” Cameron, who had campaigned to stay in the bloc, told reporters in Brussels after his talks with the other 27 EU leaders.

In an atmosphere of “universal respect” for the U.K. electorate’s decision, European leaders had understood that “Britain should seek the closest possible relations over trade and security” with the bloc, said Cameron, who will step down to make way for a new Conservative prime minister by October.

The people who’ve been left behind in Britain and the United States are making themselves heard.

Should the US Fed be easing policy after the Brexit vote?

The Fed obviously was unprepared for the outcome. US President Barack Obama, Bill Clinton and Fed Chairman Janet Yellen had all weighed in on the ‘Remain’ side.

Some US Presidential contenders realize the full extent that much of our citizenry feels left behind. The solutions proposed by candidates may be pipedreams, but one clearly can be applied across the developed world. Infrastructure is falling apart. It needs repair. Good jobs can be created for the disaffected.

In the meanwhile, stop gap measures might be applied by the central bank.

Should Yellen start explaining negative interest rates? In part this depends on who needs help? Is it her job to stabilize markets? Unfortunately during the sub-prime mortgage crisis which began in 2008, only needs of outsized banks, the markets and the very wealthy were addressed.

In the US, both Democrats and Republicans know that we have to repair our bridges and highways. An infrastructure bill passed our legislature this spring in which the US Fed, in a highly unusual move , provided financing.

We have written, over and over, that the idea that central banks should be the prime movers in shaping the economy is undemocratic and an inappropriate aggrandizement of their role.

They have stepped in where others fear to tred. But now is not too soon to start looking elsewhere for overall guidance of the economies of developed countries. Other Brexit’s will happen if we don’t.

Britain has voted to remove itself from the European Union in a move that could set off a raft of financial and economic uncertainty across the globe.

An intense campaign over the U.K.’s place in the continent-wide government came to a head Thursday, with voters deciding they no longer want to work with other nations in the Brussels-based partnership.

The potential for an unprecedented exit of one of the EU’s biggest members has gripped policymakers and financial markets on both sides of the Atlantic.

The campaign to pull out has been driven by growing complaints about Britain’s inability to write and enforce its own laws. The growing number of Middle East refugees seeking solace in Europe has heightened concerns, driving the campaign to pull out of the 28-nation governing body.

The stunning murder of a British politician, Jo Cox, earlier this month cast even further doubt on the high-stakes vote. Cox, a supporter of remaining in the EU, was allegedly killed by a man who called for “freedom for Britain” in court.

Federal Reserve Chairwoman Janet Yellen said that the central bank opted not to raise interest rates earlier this month in part because of the looming Brexit vote, and told lawmakers it could carry “significant economic repercussions.”

When he visited the country in April, President Obama warned that if Britain were to leave the EU, it could throw a wrench into efforts to establish a new trade agreement between the two nations.

White House officials have emphasized that the president was offering his opinion on the matter, while making clear British voters would have the final say.

But that didn’t stop some Republicans from blasting the president for his remarks, calling it out of bounds for a foreign head of state to weigh in on another country’s domestic affairs.

Speaker Paul Ryan (R-Wis.)  said: “I’m going to do exactly what the president did not do and not weigh in on this, and send the signal to our great friends and allies in Britain that we stand with them regardless of what decision they make,” Ryan said.