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Transparency Report: Not All Regulations are Equal, Not All Compromise is Good

A recent New York Times poll on the achievability of “The American Dream” produced some concerning yet unsurprising results:

Notwithstanding the bleaker view of upward mobility, the majority of those polled said they were more concerned about the possibility that too much regulation in Washington could stymie the economy than they were about the prospect of inequality. Fifty-four percent of respondents said that “over-regulation that may interfere with economic growth” was a bigger problem than “too little regulation that may create an unequal distribution of wealth.” Only 38 percent said that too little regulation posed a bigger problem.

That answer was particularly noteworthy given the persistent concerns among economists and politicians from both parties about a growing gap between the wealthiest Americans and the middle class.

Still, almost six years after the height of the financial crisis, Americans’ wariness about the banking industry that was at its center remains. Only 4 percent of respondents said they had “a lot” of confidence “in Wall Street bankers and brokers,” though 31 percent said they had “some” confidence in Wall Street. Nonetheless, 44 percent said they trusted their own bank “a lot,” and 37 percent said they trusted their banks “some.”

My question is, if not the federal government, who can regulate Wall St?

Recently attention has focused on the Federal Reserve Bank of NY, which plays an outsized roll in financial regulation as NYC is the world’s largest financial hub. However, the NY Fed’s role in financial regulation is complementary to federal regulation–it is not a substitute. 

People may not be enamored with federal financial regulation, but the answer is more regulatory power, not rolling back key provisions of the already insufficient Dodd-Frank Act.

These reported beliefs on government regulation are not surprising (to me) because the rationale behind them is clearly explained by Matt Taibbi in his book “Griftopia” (which he discusses in an interview on Wall St. Cheat-sheet):

Basically, government regulation is the kind of stuff a lot of them see on a day-to-day basis, but in a different form. If they’re a hardware store owner, they see a local health inspector or an ADA inspector coming by to make sure they’re in compliance with something. These are all little annoyances and costs that they see when they interact with government. Unfortunately, that’s what they think financial regulation is. They don’t get that it’s a completely different ball game when you’re talking about JP Morgan Chase (JPM), Goldman Sachs (GS), and that level of power requiring oversight.

This is how the GOP sells its agenda to the average Americans (aside from exploiting social rifts, which can only go so far): anything provided by the public sector (regulation, welfare programs) is ineffective and holds back growth, therefore the path to prosperity lies in deregulation and slashing the social safety net.

Over-regulation may be a problem for regular Americans at the local level. But federal under-regulation of the financial sector, environmental concerns, and campaign finance, threaten our economic stability, future, and democratic processes respectively (these also happen to be the areas where Republicans are rolling back regulations in the current government spending bill).

But the way the GOP is pushing its deregulation agenda is almost as reprehensible as the socioeconomic consequences. The environmental issue is divisive, but there is a broad consensus among Americans in favor of tighter financial regulation and campaign finance reform.

No Congressman or woman campaigned on financial deregulation or easing campaign finance restrictions, as such an agenda would never be popular enough to get someone elected. But the GOP has essentially tied the ability to run the country to these very issues.

Compromise should be measured not only quantitatively (how often did congress compromise) but also qualitatively (what did congress compromises on). While there certainly needs to be more bipartisan cooperation in Washington, there also needs to be red-lines.


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Economic Outlook: Time To Raise The Gas Tax

gas prcies tax

black lines represent significant increases in gas tax

Due to a number of factors, mainly the explosion of natural gas “fracking”, global oil prices have fallen steeply over the past 5 months. As highlighted in a recent NYT analysis, this is predominantly a good thing:

The plunge in oil prices — to about $66 a barrel from over $107 in late June — has many pundits wringing their hands. They have cited the risks of falling prices and social and political unrest overseas, not to mention the economic threat to the booming mid-American oil basin, running from Texas to North Dakota and Alberta.

“Every time you get a sudden move in oil prices, people say, ‘This is it, we’re finished,’ ” said Daniel Yergin, the author of “The Quest: Energy, Security and the Remaking of the Modern World,” and vice chairman of the energy consulting firm IHS. “People seem to forget that oil is a commodity, and like other commodities, its price moves in cycles set by supply and demand.”

While circumstances are never exactly the same, and the impact of cheap oil can be difficult to isolate from other economic factors, the broad consequence in each of these instances was the same: They stimulated global economic growth. Dr. Yergin estimated that global economic output would grow this year by an additional four-tenths of a percent with oil prices at $80 a barrel. If oil stays below $80, he said, “We may revise that to five-tenths.”

This year, the precipitating factor has been the waning of threats of disruption from Russia and the Middle East, slowing economies in Europe and Asia and, above all, a surge in production from the United States and Canada. “This time, the innovation is fracking,” said Philip Verleger, president of an energy consulting firm and former director of the Office of Energy Policy in the Treasury Department. “The sudden surge in U.S. oil production has profoundly changed the dynamics of the markets. The oil exporters have lost a third of the market they thought they’d have in 2014.”

OPEC met on Thanksgiving, but shocked markets when its members didn’t even pay lip service to the need for production cuts or price discipline. The price of oil, traded on international markets, fell about 6.5 percent that day. “Their strategy is to let prices fall and squeeze out the higher-cost producers,” Mr. Verleger said. “It’s a battle for market share.”

The time is ripe for raising the federal gas tax. I know what you may be thinking: if low oil prices increase consumption and spur economic growth, raising the gas tax will squander this economic boon. This is a classic growth killing tax!

But historically speaking, the last 3 major increases of the federal gas tax have not had a significant impact on consumer gas prices (see picture above). How is this possible?

A recurring theme here at Normative Narratives is the disconnect between industry rhetoric and market realities. Oil industry execs and lobbyists would have you believe than any increase in the gas tax will have to be passed on directly to the consumer–the reality is more nuanced.

Gas companies must compete amongst themselves–the industry realizes sizable profit margins (which can take a hit in the name of maintaining / increasing market share), and have seen a major dip in the price of their primary input, crude oil (true profits from selling American crude will also fall, but since America is a net oil importer, overall lower prices benefit American gas companies). Any gas company that tries to pass on the tax in the form of higher prices risks pricing themselves out of the market.

What are the benefits of raising the federal gas tax you ask? The gas tax feeds into the Highway Trust Fund, which in recent years has teetered on the brink of insolvency, relying on stopgap funding from the general treasury to finance highway construction and repairs.

Not surprisingly, there are huge economic costs associated with underinvestment in America’s highways:

Targeted efforts to improve conditions and significant reductions in highway fatalities resulted in a slight improvement in the roads grade to a D this year. However, forty-two percent of America’s major urban highways remain congested, costing the economy an estimated $101 billion in wasted time and fuel annually. While the conditions have improved in the near term, and federal, state, and local capital investments increased to $91 billion annually, that level of investment is insufficient and still projected to result in a decline in conditions and performance in the long term. Currently, the Federal Highway Administration estimates that $170 billion in capital investment would be needed on an annual basis to significantly improve conditions and performance.

The Highway Trust Fund once financed one of the most ambitious and economically beneficial public works projects in American History–the interstate highway system. But because of how the gas tax was structured–as a flat excise tax–the fund is now unable to adequately maintain our interstate highways.

The amount the gas tax should be raised is open to debate (previous increases of about 5 cents per gallon have had no discernible effect on average gas prices); the graphs below provide a potential benchmark. The costs of raising the tax would fall largely on major corporations (not consumers), while an improved interstate highway system would benefit everybody.

Update:

Thomas Friedman of the NYT has an interesting Op-Ed where he discusses Climate Change and the Gas Tax:

But what if Verleger is right — that just as the cost of computing dropped following the introduction of the PC, fracking technology could flood the world with cheaper and cheaper oil, making it a barrier to reducing emissions? There is one way out of this dilemma. Let’s make a hard political choice that’s a win for the climate, our country and our kids: Raise the gasoline tax.

“U.S. roads are crumbling,” said Verleger. “Infrastructure is collapsing. Our railroads are a joke.” Meantime, gasoline prices at the pump are falling toward $2.50 a gallon — which would be the lowest national average since 2009 — and consumers are rushing to buy S.U.V.’s and trucks. The “clear solution,” said Verleger, is to set a price of, say, $3.50 a gallon for gasoline in America, and then tax any price below that up to that level. Let the Europeans do their own version. “And then start spending the billions on infrastructure right now. At a tax of $1 per gallon, the U.S. could raise around $150 billion per year,” he said. “The investment multiplier would give a further kick to the U.S. economy — and might even start Europe moving.”

I am not advocating for such a steep increase in the gas tax, as such a plan would amount to regressive taxation on consumers and would be a political nonstarter.

But the article does raise the valid point that lower gas prices could hamper the global push to reduce GHG emissions.


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Ferguson, MO: Justice is a Dish Best Served Well Done

I will not comment on the actual decision not to indict Darren Wilson; I was not at the scene of the crime, and even amongst those who were, there are differing accounts of what happened.

I trust the judicial process (although there does seem to be a conflict of interest when prosecutors are asked to indict police officers; having special prosecutors for police trials makes sense); anybody who is trying to sell you an “obvious” answer is being insincere (lots of clickhole “this changes everything” type nonsense out there). Even after months of deliberation, a jury could not find sufficient evidence to indict Wilson–there is no “obvious”explanation of what happened.

I will say this–indicting and convicting Officer Wilson because a lot of people are angry would not have been justice, it would have been mob rule, the exact opposite.

For their part, Michael Brown’s family have urged protesters to remain peaceful and constructive. Unfortunately, their wishes were disregarded by many.

It is not surprising people disregarded calls by the Brown family to remain peaceful. Those who disregarded this message where protesting underlying social injustices–Michael Brown’s death at the hands of Officer Wilson was merely the spark which ignited decades of racially-charged tinder.

Unlike the exact events leading to the death of Michael Brown, these injustices are irrefutable. The ways forward are clear, if the leadership exists to mold people’s outrage into something sustained and constructive.

Police Accountability

Their is a deep mistrust between police and minority communities across America. History of racial profiling, and the failed “war on drugs” which disproportionately targets minorities, exacerbates the vicious cycle of poverty, crime, and mistrust.

One way of making police officers more accountable is a lapel camera. A lapel camera could have answered many of the unanswered questions surrounding the fatal Brown-Wilson confrontation. Wilson alleges Brown charged at him, certainly a lapel camera would have shed light on this claim.

I have heard many reasons why lapel cameras would not work, ranging from “cameras are too expensive”, to “officers will forget to turn them on”, to “recordings would be an invasion of privacy”.

Privacy can be protected by strict rules governing under what circumstances footage can be used (for example, yes in trials, no in performance reviews).

Expense should not be an issue; even a bulletproof top-of-the line lapel camera, should not be prohibitively expensive. Create a demand, and someone will supply lapel cameras at a reasonable price. Furthermore, in response to events in Ferguson, President Obama proposed spending $75 million on lapel cameras as part of a larger $263 million police reform package.

And of course officers can forget to turn on their cameras, just like they can forget to turn on the safety on their guns, or read someone their rights. By setting up proportional penalties, their is no reason to believe lapel cameras would be misused anymore than other equipment.

Camera’s do not just benefit the public at the expense of police officers. Lapel cameras can validate necessary use of force, and protect police officers from unjust complaints. As Cpl. Gary Cunningham of Rialto California put it “I think it protects me more than it protects the public,”

Before implementing its program, Rialto police launched a yearlong study in 2012, deploying wearable cameras to roughly half of its 54 uniformed patrol officers at a given time. The results were remarkable. The department saw an 88 percent decline in complaints against officers and use-of-force incidents plumetted 60 percent.

“After we got the data, we kind of sat down and went, ‘Wow, look at these numbers. There’s something to this,’” said Chief Tony Farrar, the program’s brainchild.

The debate about lapel cameras is taking place in municipalities across the country, and now at the national level. This is a good start towards building trust, transparency, and accountability between police officers and those they serve and protect.

Personal / Social accountability

Why aren’t there more minority police officers in places like Ferguson, MO? I do not believe their are any discriminatory hiring practices at work here, such a barrier could not exist in modern American institutions without being exposed. If anything, municipalities often have affirmative action mandates to hire more minority officers. So then, what is the issue holding back more representative police forces?

I think at least part of the problem is cultural (or in economics speak, a “demand side” issue). Minorities often face ridicule for pursuing a career in public service. Instead of being labeled a “hero”, they are labeled “snitch”, “rat”, “traitor”, etc. Facing ridicule and rejection from their communities, is it really surprising more minorities do not pursue careers as police officers?

Cultural change can only occur at the community level. It could be complemented by highly visible campaign of celebrities / athletes / entertainers on a larger scale, but the grass-roots community element is indispensable.

And this social / personal accountability goes beyond encouraging minorities to become police officers. No matter what a person decides to do for a living, we all have civic duties; to effect change, people must become more politically active:

Though two in three Ferguson residents are black, the city government is almost entirely white.

Local African-American leaders say that’s because, for a variety of reasons, blacks across the region simply haven’t participated in city elections. Until that changes, they add, Ferguson’s racial tensions aren’t likely to get better.

Black political leaders in the area say it’s not surprising that Ferguson’s government isn’t responsive to their community’s concerns, because blacks across St. Louis County simply haven’t turned out to vote in large numbers, or run candidates for office. 

No one collects data on turnout by race in municipal elections. But the overall turnout numbers for Ferguson’s mayoral and city council election are discouraging. This year, just 12.3% of eligible voters cast a ballot, according to numbers provided by the county. In 2013 and 2012, those figures were even lower: 11.7% and 8.9% respectively. As a rule, the lower the turnout, the more the electorate skews white and conservative.

“I think there is a huge distrust in the system,” said Broadnax, a Ferguson native. Many blacks think: “Well it’s not going to matter anyway, so my one vote doesn’t count,” she said. “Well, if you get an entire community to individually feel that way, collectively we’ve already lost.”

But State Sen. Maria Chappelle-Nadal, whose district includes Ferguson and who has been involved in the protests, said she thinks the anger over the death of 18-year-old Michael Brown will translate into increased political engagement among the region’s blacks.

“I think this issue is changing the game completely,” said Chappelle-Nadal. “People are upset.”

Still, for [John] Gaskin, a board member of the national NAACP, the current lack of participation among the area’s minorities makes it’s tough to hear older activists talk about the sacrifices made in the civil rights struggle.

“It brings me to tears hearing from Julian Bond and everyone how important it is to vote, for the people that lost their lives,” Gaskin said, “when we’ve had to almost try to convince people to utilize this precious tool that so many people in the world don’t have access to.”

To help facilitate political engagement in Ferguson, mayor Jay Nixon today announced the “Ferguson Commission“:

An African-American pastor and a white civic leader will lead a state-appointed Ferguson Commission that will work toward “healing and positive change” in the St. Louis area, Gov. Jay Nixon of Missouri announced  Tuesday.

The diverse 16-member panel has about 10 months to listen to residents, study social and economic issues and make recommendations for changes. The commission includes lawyers, activists, pastors, a police sergeant and a professor.

Inclusive political institutions should be the norm, not an ad hoc response to tragedy.

Mainstream development economics is predicated on a rights based approach. In America we no longer have to fight for basic political and civil rights, but simply exercise them.

But the ease of our modernized society has bred comfort and complacency. Events such the shooting of Michael Brown, and the ensuing protests, serve as a stark reminder that being at the frontier of progressive values requires constant effort.

If these protests can remain peaceful, and fuel sustained political activism, they will serve as a testament that our democratic system–while not always pretty or linear–is still capable of pushing the frontier of progressive values.

Let the concepts addressed in this blog–accountability (of police officers, but also of ourselves and our communities), inclusive politics, and a politically engaged citizenry–be the legacy of Michael Brown.

Let his death be the catalyst of a new Civil Rights movement, one which bridges racial divides and addresses underlying socioeconomic injustices which hinder Americans of all races and creeds.

Such cultural shifts would amount to a much more meaningful legacy than any individual indictment / conviction ever could have.

Update: The deaths of Michael Brown and Eric Garner were completely separate incidents.

In the case of Eric Garner’s murder, video evidence clearly showed a non-threat–and perhaps a good Samaritan who broke up a fight–being choked to death (a claim confirmed by a medical examiner’s autopsy).

In his defense, Officer Pantaleo said he never meant to cause Eric Garner harm:

…the officer’s testimony, as recounted by Mr. London, seemed at times to be at odds with a video of the encounter, such as his stated attempt to get off Mr. Garner “as quick as he could.” 

It is not even controversial, but I do forcefully condemn the decision not to indict Daniel Pantaleo on charges of at least manslaughter.

The Justice Department is launching a civil rights investigation into Mr. Garner’s death; hopefully justice is served in this clear case of police misconduct and brutality.


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Economic Outlook: Relaxed Regulations, Lax Regulation, and “Too-Big-To-Regulate”

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A Short History of Financial Deregulation in the United States; CEPR

Data from the National Income and Product Accounts (1947-2009) and the National Economic Accounts (1929-47) are used to compute added value as a percentage of gross domestic product in the United States.

As an economist living in the Post-Great Recession world, I often consider the effects of greater financial sector regulation on overall economic performance.

Given my populist leanings, it may surprise you to hear that I have been conflicted about the merits of greater regulation (or more accurately, the merits of pursuing such reforms now). The argument (in my head) usually goes something like this:

During a period of weak economic growth, which we are now just starting to emerge from, a growth sector such as finance should not be held back. Listening to (part) of the hearing between the Senate Subcommittee and Goldman Execs, who invoked the concepts of economic efficiency and job growth with bravado, this is exactly what financial sector advocates want people to think.

But is there any merit to these claims? Inflating a bubble and calling it growth does not make it so, and certainly does not necessarily benefit the vast majority of people. This conclusion (which may be obvious to some, but given my determination to consider arguments and counter-arguments, consequences and unintended consequences, has to this point eluded me) led me to a much broader question:

If GDP growth doesn’t necessarily help people, perhaps a slight slowdown in growth would not necessarily hurt people?

It has long been accepted by development economists that GDP growth alone is not a reliable measure of increases in well-being / standard of living. Is it time to consider that paring back GDP growth, in order to set our financial system on more sustainable ground, might be in best interests of the vast majority of Americans?

Before considering these points, we should explore (1) how the financial sector got “too big to regulate”, and (2) why efforts to regulate big banks have proven so lackluster.

In my opinion, the root causes (and therefore solutions) are straightforward:

(1) Intentional deregulation of financial markets to spur economic growth, and;

(2) Lax enforcement of those regulations that are still on the books, due to the “revolving door” between the financial sector and government regulators

(For my readers who want a more in depth look at these issues, I would highly recommend Matt Taibbi’s best-selling book “Griftopia”)

Relaxed Regulations:

A two-year Senate-led investigation is throwing back the curtain on the outsize and sometimes hidden sway that Wall Street banks have gained over the markets for essential commodities like oil, aluminum and coal.

The Senate’s Permanent Subcommittee on Investigations found that Goldman Sachs and JPMorgan Chase assumed a role of such significance in the commodities markets that it became possible for the banks to influence the prices that consumers pay while also securing inside information about the markets that could be used by their own traders.

Until about 20 years ago, regulated banks faced tight constraints that barred them from owning physical commodities and limited them to trading in financial contracts that were linked to the prices of commodities. But a substantial relaxation of the rules allowed the banks to own actual commodities themselves, known as “physical assets” on Wall Street.

During the second panel of the day, two executives from the aluminum industry said that Goldman’s practices were unusual and were costing aluminum users.

“The warehouse issue is having a profoundly negative impact on our customers’ businesses,” said Nick Madden, the chief supply chain officer at Novelis, a producer of rolled aluminum.

Mr. Madden said that when he first saw The Times article on Goldman’s practices, he didn’t understand why the warehouse company was encouraging long lines for customers wanting to remove their metal.

“Now I see it in black and white and I understand it,” he said, in reference to the subcommittee’s report.

One warehousing source, who is familiar with these transactions, said what he read in the report was “immoral, but not illegal”.

Far from increasing efficiency, it appears that financial intermediation may actually harm related “real” elements of the economy in certain situations.

Lax Regulation:

So deregulation has led to expansion by financial institutions into “physical assets”. But what about regulations that are still on the books? Surely, in the wake of The Great Recession, accountability and transparency have been force-fed down the financial sector’s throat?

Unfortunately, this is not the case. In an attempt to erect a meaningful barrier between the financial institutions and those who regulate them, new legislation has been proposed by Rhode Island Senator Jack Reed:

A senior Democratic senator (Jack Reed) has introduced legislation that would make the head of the New York Federal Reserve Bank a presidential appointee subject to Senate confirmation.

The New York Fed also oversees some of the nation’s largest financial institutions, and has been questioned in recent years for failing to look with enough rigor at the operations of companies like JPMorgan. The hearing on Friday will address the question of whether Fed regulators may be too soft on the banks they oversee.

“Someone at this institution needs to be directly accountable to Congress,” Reed said in a statement. “This legislation is about holding the New York Fed accountable … It’s just too powerful to be left unchecked.”

The idea of making the job a presidential appointment is not a new one: with Reed’s support it was included in the Senate’s version of Wall Street reform legislation in 2010, although it was not included in the final Dodd-Frank law.

“The perception today, and the perception for years, is there are no fences between the New York Fed and the banks they’re regulating,” said Reed.

After the subcommittee finished questioning Dudley, it turned to the matter of solutions. Columbia University professor David Beim, the author of a harsh internal investigation into the New York Federal Reserve, told the subcommittee that more needs to be done to eliminate the revolving door between the finance industry and the Fed.

“The problem is regulators and bankers form a community,” he said.

Given the dysfunction of our Federal government, making the NY Fed President a presidential appointee subject to congressional approval is by no means a sure fix. But there have been bipartisan efforts to reign in the financial sector; such a move could certainly be part of a more comprehensive financial sector reform agenda.

Too-Big-To-Regulate:

..Six years after the onset of the financial crisis, four years after Dodd Frank and two years after the biggest banks submitted the first drafts of their living wills — the Federal Deposit Insurance Corporation and the Federal Reserve rejected the plans from 11 large banks as “unrealistic or inadequately supported.” The regulators said further that the banks had failed “to make, or even identify” structural and operational changes that would be needed to attempt an orderly resolution.

And yet the regulators are not taking steps to downsize the banks. For that to occur, the F.D.I.C. and the Fed have to agree that living wills are unworkable and that more forcible downsizing is needed. The F.D.I.C. seems to have reached that conclusion; it said flatly that the plans don’t work. But not the Fed, which has told the banks to submit new plans by July 1, 2015. The banks have had four years already. Now they have nearly another year to toy with a process that has utterly failed to produce credible results.

Will anything change between now and next July? Using the history of the last several years as a guide, the biggest banks will be even bigger, more complex and more interrelated by then. They will be undercapitalized and overleveraged. They will be reliant on unstable sources of short-term financing and will be more steeped than ever in speculative derivatives transactions.

In short, they will still be too big to fail, too big to manage and, judging from the Fed’s latest indulgence, too big to regulate.

While business cycles are largely natural occurrences, the severity of downturns are largely determined by the regulatory policies in place. This is why, following the Great Depression, rules limiting questionable financial activities were put in place.

But as time went on, and the pain of The Great Depression faded in memory, these rules were repealed in the name of economic efficiency / growth. Instead what we got was increasing inequality and the regulatory groundwork which enabled The Great Recession.

We must stop relying on “self-regulation” of the financial sector; the fact that the Fed has given financial institutions so much leeway and time in writing their own “living wills” is indeed disconcerting. Since the collapse and bailout of the financial sector, “Too-Big-To-Fail” financial institutions have only gotten larger, potentially setting the stage for an even more painful recession down the road.

When growth is the result of over-leveraging, opaque bundling, insider trading, and imaginative accounting, it benefits a select few at the expense of everyone else.

It is past time to question the assertion that tighter regulation of financial markets will lead to a meaningful increase in unemployment / deterioration of standard of living. All evidence points to the contrary; financial regulation would benefit the vast majority, at the expense of a select few who have made their fortunes exploiting loopholes and shady relationships.

The further we get from the financial crisis, the less necessary tighter financial regulation will seem. The “benefits” of having an under-regulated financial market will look that much greater than the “costs” of regulation–until it all comes crashing down.

The time for meaningful action is passing us by.


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Green News: The U.S. and China Discuss Energy Poverty, Sustainable Development in Africa

“Common But Differentiated Responsibilities”:

During the recent APEC summit, President’s Obama and Xi Jinping announced what could be a landmark environmental agreement. The U.S. pledged to reduce carbon emissions by 26 percent to 28 percent from 2005 levels by 2025. China pledged to reach peak emissions by 2030, while increasing its renewable energy consumption to 20% of total consumption (China currently gets about 10% of its energy from zero emission sources).

This announcement has been received well by the international community. With the two largest GHG emitters on board (in gross emissions, the map above shows per-capita emissions), many believe this announcement could galvanize support for a legally enforceable climate treaty, to be finalized during the 2015 UN Climate Change Conference in Paris.

Another potential area of cooperation, which has received far less attention but is nonetheless significant, were discussions between the U.S. and China regarding clean energy investment in Africa (original article):

The United States is considering partnering with China on improving electricity in Africa and the proposal could be part of bilateral discussions when President Barack Obama visits Beijing next week, two sources involved told Reuters.

The 48 countries of sub-Saharan Africa, with a combined population of 800 million, produce roughly the same amount of power as Spain, a country of just 46 million.

The shortage imposes a massive burden on economies in the continent, constraining growth and leading to hundreds of millions of people remaining mired in poverty.

China’s policies in Africa have also been described by some African leaders as “neo-colonial” – lending money to impoverished states to secure natural resources and support state-owned Chinese construction companies.

U.S. Secretary of State John Kerry hinted this week that discussions during the APEC conference to conclude a Trans-Pacific Partnership (TPP) would involve energy agreements in other parts of the world.

“The TPP is not only a trade agreement but also a strategic opportunity for the United States and other Pacific nations to come together, to bind together,” Kerry said in a speech in Washington on Tuesday.

“Second, powering a clean energy revolution will help us address climate change while simultaneously jump-starting economies around the world,” Kerry added.

Approximately 1.3 billion people in the world live without access to energy, 95% of which live in Sub-Saharan Africa or developing Asia. Without access to energy, it is impossible for a society to modernize; energy access is an indispensable component of poverty reduction. How those who currently live without access to energy fulfill their energy needs will be a primary determinant in meeting global emission targets.

According to the International Energy Agency, 2/3 of known fossil fuel reserves must stay in the ground in order to reach global emissions targets. This will require both ambitious climate agreements from large emitters such as the U.S. and China, as well as aggressive investments in clean energy in countries that do not currently emit as much.

(For more reading on Africa’s Energy and Economic landscape, check out the 2014 World Energy Outlook Special Report on Africa)

Natural Resource Revenues, Accountability, and Development:

The Post-2015 Development Agenda, while appreciating the role of official development aid (ODA) in financing development initiatives, also recognizes the limits of relying on such a volatile source of funding. In order to reliably secure the finances needed for sustainable human development, developing countries will need to mobilize natural resource revenues in a responsible way.

This is admittedly  tall order. Historically, the “natural resource curse” has led natural resource revenues to be extracted by corruption rulers, cementing the rule of regressive, extractive regimes. Nigeria’s Sovereign Wealth Fund, while imperfect, provides a model for bringing transparency and accountability to natural resource revenue management.

Neocolonialism and corruption will not lead to development. When it comes to investing in Africa, the “return on investment” is in creating stable, resilient allies, who can positively contribute to global security and become new markets for trade; it is a long-game, not a short-game.

Lots of people have their hands out to grab resource “rents”. Therefore, a strong network of accountability is required if natural resource revenues are ever to benefit a countries poor / marginalized. This network includes social accountability (individuals, civil society organizations, and NGOs); corporate accountability (businesses operating in developing countries); and good governance at all levels (local, national, and international).

The Extraterritorial Responsibilities of Global Leadership:

During the APEC summit, President Obama urged China to be a partner in ensuring world order:

U.S. President Barack Obama said on Monday a successful China was in the interests of the United States and the world but Beijing had to be a partner in underwriting international order, and not undermine it.

“Our message is that we want to see China successful,” Obama told a news conference. “But, as they grow, we want them to be a partner in underwriting the international order, not undermining it.

He urged China to move “definitively” to a more market-based exchange rate and to stand up for human rights and freedom of the press.

At the risk of sounding cliche (or like a Spiderman move), with great power comes great responsibility. If China wants to be recognized as a global leader, it must show the world it is capable of fulfilling the obligations associated with such a role.


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Normative Narratives Turns 2!!

WordPress just informed me I started Normative Narratives 2 years ago today!

During this time I have enjoyed critically considering the major issues of the day, and developing as a writer. If my readers have enjoyed reading my blogs half as much as I have enjoyed writing them, then I am doing a good job.

Over these past two years, my responsibilities have changed considerably (from being a graduate student to having a full time job), forcing me at times to pare back on my blogging.

What has not changed is my commitment to the principles guiding NN (mission statement, manifesto), nor my resolve to continue blogging regularly whenever I can.

Thank you for being part of this journey with me; who knows where it may lead.

In other news, Happy Veterans Day! I would not be able to do what I do if not for the brave men and women–both past and present–who defended and continue to defend our freedoms!


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Economic Outlook: De Blasio Administration Rebuffs JPMorgan; Sky Doesn’t Fall

Original article:

The possibility that JPMorgan Chase would build a two-towered, $6.5 billion headquarters on the Far West Side of Manhattan streaked across the skyline in recent weeks, only to die quietly on Tuesday.

Jamie Dimon, chairman of Chase, called Mayor Bill de Blasio and Gov. Andrew M. Cuomo on Tuesday to say that the country’s largest bank had decided to stay put on the East Side.

In the course of negotiations, the bank suggested that thousands of midlevel jobs could leave the city if the deal foundered. The mayor, in turn, publicly scoffed at the idea of handing over $1 billion in tax breaks and cash to Chase, on top of an existing $600 million in property tax breaks.

“This is an outcome that validates our approach, and our belief that these deals often come down to factors that have nothing to do with taxpayer subsidies,” Alicia Glen, deputy mayor for economic development, said in a statement on Tuesday. “We’re glad that JPMorgan has decided to maintain its buildings and its work force right where they are for the foreseeable future.”

Critics of corporate subsidies worried that the city might be returning to an era of retention deals, which had largely disappeared under Mr. de Blasio’s predecessor, Mayor Michael R. Bloomberg. The Committee for Better Banks, which includes labor unions and some liberal groups, was about to issue a report denouncing subsidies for Chase when the deal collapsed.

“New York has had an amazing run of job growth over the past decade,” said Jonathan Bowles, director of the nonprofit Center for an Urban Future. “I don’t see the need to turn back the clock and start another wave of big companies clamoring for tax breaks.”

When I started Normative Narratives 2 years ago, one of the first issues I wrote about was the (mis)use of tax dollars to attract private sector jobs. This “race to the bottom“, alongside unlivable minimum wages, make up the two most glaring forms of corporate welfare in America.

At a time of widening inequality (during which economic growth has gone almost exclusively to the wealthiest), marked by record corporate profits / cash holdings / tax minimization, and calls by those on the political right to slash the social safety net in the name of “fiscal responsibility”, corporate welfare is tantamount to taking from the poor to give to the rich.

Tax dollars should be spent on projects that make areas naturally more attractive to employers (a more skilled citizenry, better infrastructure, etc.). Since these projects are mutually beneficial, private money / expertise  should supplement public efforts (public-private partnerships), which in turn would build sustainable partnerships between corporations and municipalities (the opposite of “races to the bottom”).

Blindly throwing money at corporations because they promise to create jobs, without legally binding commitments and closely scrutinized CB analyses, is not a growth strategy.

Corporate interests always claim the sky is about to fall; look at an almighty “job creator” the wrong way and they’ll close up shop and skip town. In reality, there are costs and uncertainties involved in moving, two things businesses don’t like. Case in point; JP Morgan threatened to move if it did not get what it wanted, only to stay put.

Good job by the De Blasio administration in standing up to JP Morgan. The net result is the same number of jobs (perhaps some short term construction jobs were foregone), and $1 billion more in NYC’s coffers to address the many deserving issues affecting the city. Hopefully this show of political will can serve as an example for municipalities around the country.

Proponents of such subsidies would probably argue that NYC bargains from a unique position of power, which is true. However, other municipalities have their own “natural” comparative advantages (such as lower real estate costs, lower costs of living, economies of agglomeration, etc). If such a “draw” to an area does not exist, all the more reason to invest in creating one!

Generally speaking, large corporations decide they need to expand operations in order to meet demand, then shop around for the best deal (not the other way around). In other words, most subsidized jobs would exist with or without subsidies.

Ultimately, there needs to be better coordination at the federal level (including greater redistribution of tax dollars from high employment to low employment areas) to ensure municipalities are not bidding against each other for jobs that would be created anyway.

There are no shortcuts to sustainable economic development, but fiscal mismanagement, such as foregoing investing in making a market “naturally” attractive in order to subsidize jobs, can stall / reverse the process. Racing to the bottom provides cover for current administrations (and jobs for a select few), while ultimately leaving an area worse off in the long run (like putting a very expensive band-aid on a broken bone).

The De Blasio administration and JP Morgan had a staring contest, and JP Morgan blinked. If you happen to find yourself in NYC any time soon, look up–the sky isn’t falling.


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Transparency Report: Keeping Pressure on the UN to ‘Do The Right Thing’ With Respect To Haiti’s Cholera Victims

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Last October, I wrote a blog about the UN’s role in bringing Cholera to Haiti, subsequent steps to avoid accountability, and the impact this might have on the Post-2015 Development Agenda. Little had changed on this front until earlier this week:

This week Georges, one of five Haitian and Haitian-American plaintiffs named in the case, may be one step closer to being granted his day in court. Institute for Justice and Democracy in Haiti (IJDH) lawyers will get their chance on Thursday to argue that the lawsuit should go forward. It was filed in a federal court in New York a year ago, and the United Nations has declined to acknowledge it, on the grounds that the organization enjoys diplomatic immunity.

“The case is indefensible both legally and morally, from the U.N.’s perspective,” said Brian Concannon, the lead attorney at IJDH. If the judge agrees that the court has jurisdiction to hear the case, despite the U.N.’s historic immunity from prosecution, he said, that would likely mean the plaintiffs will win the case.

The IJDH’s lawyers are demanding three things: funds to fight the ongoing epidemic and clean up Haiti’s rivers (only 1% of a $2.27 billion 10-year pledge have been raised), financial compensation for victims and an apology from the United Nations. Implicit in their lawsuit, however, is the far bigger challenge, lawyers say, to the U.N.’s immunity from prosecution.

There are, however, official channels for victims of U.N. actions to seek redress. If complaints are made in the context of peacekeeping operations, the host country and the U.N. typically agree to a system for handling these claims. Despite an agreement between the U.N. and Haiti that promised victims the right to file claims for unintentional harms caused by the organization’s personnel, no such system was ever set up. (The U.N. has not offered an explanation, and a U.N. representative declined to comment for this article).

Even critics of the United Nations concede that diplomatic protections for the U.N. are, overall, a “good thing,” said IJDH’s Concannon, allowing the organization to provide alternative justice in countries where local courts do not ensure a fair trial. But he and others say the cholera case shows a U.N. too unwilling to waive its immunity. “The U.N. is currently suffering from an accountability crisis,” said Beatrice Lindstrom, another lawyer working on the case for the IDJH, “one in which they treat ‘immunity’ to mean ‘impunity.’ ”

Whatever the results of that hearing — which could take weeks, or months, to be determined — an appeal is likely. Said Lindstrom, “We’ve always understood the lawsuit to be a tool to keep public attention and pressure on the U.N. to change course and do the right thing.”

The Haitain Cholera epidemic and lackluster response remains a black cloud over the UN, as it should. The Post-2015 Development Agenda, which starting at the end of 2015 will influence the direction of national development plans and hundreds of billions in development aid, has human rights based accountability at it’s core. The Agenda calls for all actors–public, private, non-profit, etc.–to be held accountable for the human rights implications of their actions.

The UN should have owned up to it’s mistakes in the first place (“waived it’s immunity”), taking the opportunity to lead from the front and show that all actors, even the UN itself, must be held accountable in order to promote sustainable human development. Unfortunately it did not, necessitating a negative PR campaign and legal battle. Furthermore, if the lawsuit makes it to court it could set a costly legal precedent, hampering the UN’s ability to respond to crises going forward.

The UN has gone to great lengths to ensure the Post-2015 Development Agenda is inclusive, participatory, and well received by people around the world. These decisions were made in response to a perceived weakness of the preceding Millennium Development Goals; having been drafted by development professionals behind closed doors, they did not fully address many impediments to poverty eradication (specifically those related to political rights and good governance–empowering vulnerable people to become active participants in development, as opposed to passive recipients of aid).

Refusing to sit down with Haitian Cholera victims is not only a failure of justice in Haiti, it threatens to undermine support for (and therefore the efficacy of) the Post-2015 Development Agenda.

The UN is often accused of being ineffective and useless. As someone who is well versed in economic development, I know that these claims are generally made out of ignorance; there are checks in place which purposefully limit the ability of the UN to impose it’s values on a sovereign nation.

This case, however, is different–the only thing holding the UN back from championing it’s own principles is the UN itself.

It is not too late for the UN to reverse course and make this right, but an about-face on this issue does not seem to be forthcoming. As a supporter of this organization and it’s many important missions, I hope that its leadership recognizes the damage caused by its current course of action.


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Economic Outlook: Of Minimum Wages and Employment (Revisited)

Another hot button topic during the 2014 midterm election season are candidates stances on increasing the federal minimum wage.

This past February, the CBO released its analysis of the effects of a federal minimum wage increase on economic growth, employment, and poverty. Those on the political right seized on the reports projection that raising the minimum wage could result in 1 million fewer jobs in America.

I found Jared Bernstein’s Economix blog on the subject pretty even-handed (click here to see my previous blog on the topic):

It is important to recognize that there is a very wide range of estimates from which the budget agency can choose, as shown in the chart below, which plots results of the employment effect from dozens of studies (from a recent set of slides from the White House Council of Economic Advisers).  This wide range does not imply that the budget office made a mistake, though it looks to me as if it applied a higher job-loss estimate than is the current consensus among economists who’ve closely studied the issue.

Note:

As the chart shows, the employment impact from this “meta-analysis” clumps around zero, which is why the report finds that the policy is a significant net plus from the perspective of low-wage workers: Many more workers get a raise from the policy than are displaced from their jobs.” (Jared Bernstein, Economix blog)

There is no policy I can think of that generates only benefits without any costs, and policy makers always have to weigh the two sides. In the case of the minimum wage, on the benefits side of ledger, the budget office shows that 16.5 million low-wage workers would directly get a much-needed pay increase at no cost to the federal budget.

16.5 million workers will benefit from a $10.10 minimum wage by 2016, 900,000 will be raised out of poverty, with negligible effects on the federal budget.

The CBO report was a projection. What have minimum wage “experiments”, carried out in America’s “laboratories of democracy” (states and municipalities), revealed?

The White House told us they were referring to the seasonally adjusted growth of non-farm jobs since December 2013. So we crunched the numbers for state-level employment data, which is collected by the Bureau of Labor Statistics.

The comparison involved nine states that increased their minimum wage automatically early in the year to keep pace with inflation (Arizona, Colorado, Florida, Missouri, Montana, Ohio, Oregon, Vermont and Washington) plus four more states that passed new laws to hike the wage (Connecticut, New Jersey, New York and Rhode Island). The other side consisted of 37 states that didn’t boost their minimum wage at all.

Using the second method — the one that gives greater weight to high-population states — we found that job growth over that eight-month period averaged 1.092 percent in the wage-raising states, compared to 1.090 percent in the non-wage-raising states. That’s a higher rate of job growth in the minimum-wage-raising states — but by the almost comically narrow margin of 2/1,000ths of one percent.

From this 8-month comparative analysis, we can see that minimum wage changes have had essentially no impact on employment levels. The meta-analysis seems to have been vindicated–I guess economists are good for something after-all.

What does this mean? Which stance on minimum wage increases has been vindicated? I would say it has to be the pro-minimum-wage-increase side of the debate.

Increasing the federal minimum wage is not meant to be a “job-creating” policy; its primary purpose is to redistribute income from the top of the economic pyramid (wage payers) to the bottom (wage earners). It is a “market” solution that does not require taxation and welfare spending, so money would not go to those “lazy welfare recipients” (this is not my view, however a significant proportion of Americans do view welfare recipients this way, and it is necessary to consider alternative perspectives when trying to pass legislation in a democracy).

One may think such an inequality / poverty reducing solution would be agreeable to proponents of “small government”, and one would be wrong. Since opponents of increasing the minimum wage cannot assail deficit spending going to undeserving recipients, they have relied on the “jobs lost” argument. Fortunately, this argument becomes less and less viable the more it is challenged and disproven.

Raising the minimum wage does not just address the “symptoms” of inequality / poverty–there are important long term / inter-generational implications of minimum wage increases. Having more money enables people to build their skills, take more entrepreneurial risks, and provide better upbringings for their children (which obviously affects their earning capacity later in life).

“Meta-analysis” of the effects of minimum wage increases on employment clustered around zero, and these findings have been backed up by the non-partisan statistics produced by the Bureau of Labor Statistics (in the interest of full disclosure, I should mention that I work for the BLS, although my job has nothing to do with employment statistics).

The mechanism by which minimum wage increases raises poorer peoples income is straightforward. How people would choose to use their new-found income is less straightforward–some will predominately invest in into their and their families futures, while others will use the majority for instant gratification. While not as targeted as a welfare program, raising the minimum wage is the most politically viable solution to America’s inequality problems.

Contemporary American political discourse is dominated by the related themes of “equality of opportunity” and “social mobility”. Raising the federal minimum wage would bring immediate relief to America’s poorest workers, while moving closer to the utopian goal of “equality of opportunity”. Furthermore, it would accomplish these goals without any meaningful impact on employment rates or the federal budget.

Some redistribution of income in necessary; inequality is a drag on economic growth, and poverty is a root cause of many other societal ills. History has proven over and over again that “trickle-down” economics does not work. Minimum wages should also be linked to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), periodically (once per year?) increasing to reflect changes in cost of living.

If our federal government continues to fail in this regard, leaders at the state and municipal level must step-up–this is a matter of both present and future socioeconomic justice.

 


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Economic Outlook: Magic Asterisks v. Cross-Country Analysis

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The Great Debate Continues–The Austerity v. Stimulus Referendum of 2014:

It has been over 6 years since the beginning of “The Great Recession”. As the stimulus vs. austerity debate rages on, it is worthwhile to evaluate the efficacy of these competing economic ideologies, as they are essentially up for referendum in the 2014 U.S. midterm elections.

It is almost impossible to find truly neutral economic analysis; there are experts and spin-doctors across the political spectrum, people whose jobs are to cherry-pick facts and provide anecdotes to vindicate their positions. I try my best to be objective, but I am sure that my progressive biases are evident to my readers.

One thing that cannot be faked, at least in modern democracies, is macroeconomic history (thanks to advances in data collection, government budgetary transparency / accountability and communications technologies). So what have the past 6 years taught us?

On one hand, the doctrine of “expansionary austerity” relies on “magic asterisks“–the math doesn’t add up. This is not just a liberal claim, it is backed up by the [absence of] economic growth in countries and states that have tried / been force-fed the bitter pill of “expansionary austerity”.

On the other hand, robust, cross-country analyses of post-Great Recession economic policies, carried out by the IMF, have [slowly] acknowledged the damage caused by austerity / benefits of stimulus spending (and this is the IMF here, not exactly a pro-poor institution).

The Case For Austerity–Magic asterisks:

At the state level, Republican governors — and Gov. Sam Brownback of Kansas, in particular — have been going all in on tax cuts despite troubled budgets, with confident assertions that growth will solve all problems. It’s not happening, and in Kansas a rebellion by moderates may deliver the state to Democrats. But the true believers show no sign of wavering.

the nature of the budget debate means that Republican leaders need to believe in the ways of magic. For years people like Mr. Ryan have posed as champions of fiscal discipline even while advocating huge tax cuts for wealthy individuals and corporations. They have also called for savage cuts in aid to the poor, but these have never been big enough to offset the revenue loss. So how can they make things add up?

Well, for years they have relied on magic asterisks — claims that they will make up for lost revenue by closing loopholes and slashing spending, details to follow. But this dodge has been losing effectiveness as the years go by and the specifics keep not coming…

The Case For Stimulus–IMF Cross Country Analysis:

The International Monetary Fund, showing heightened concern over a slowing world economy, said on Tuesday that cash-rich countries like Germany needed to step up large public investments to help keep the flagging global recovery on track.

Its estimate for United States growth in 2015, 3.1 percent, outpaces all major industrialized countries and exceeds as well a number of emerging markets, which in theory are supposed to grow at a substantially more rapid clip.

The fund unveiled this week a paper arguing that large-scale infrastructure investments, if properly undertaken, could bring relatively quick growth benefits — a message that seemed to be directed at deficit-obsessed eurozone governments, including Germany.

“Infrastructure investment, even if debt-financed, may well be justified,” Olivier Blanchard, the fund’s senior economist, said at the news conference on Tuesday.

Mr. Blanchard pointed out that with interest rates at modern-day lows — Germany can borrow money for 10 years at below 1 percent — taking on extra debt to stimulate the economy need not be seen as profligacy.

He offered up a brief economic primer to underscore his point. “It is an irony of macroeconomics,” he said with a small smile, “that for countries with too much debt, sometimes the solution is to create more debt.”

Mr. Blanchard, who oversees economic research at the I.M.F., was behind the fund’s public recognition two years ago that heavy-handed austerity policies in Europe had a larger-than-expected impact on economic growth.

Now, it seems, the global watchdog seems to be going one step further by urging eurozone officials to relax their rigid austerity measures.

What Does “American Exceptionalism” Mean to You?:

In America, those who oppose stimulus spending–fiscal conservatives–also tend to believe in “American Exceptionalism”. What happens in other countries is not relevant to America; “we’re special”, they claim.

These same opponents of stimulus spending may also argue (with negative connotation) that “the U.S. is turning into Europe”. However,  as you can see from the graphs at the top of the post, the U.S. has far lower spending and unemployment rates than other wealthy economies.

The great irony, which I am sure is lost on those who worry about the “eurofication” of America, is that it was in large part our ability to pursue policies that they would consider “European” (the ARRA, QE), that enabled the U.S. to lead the global economic recovery.

I too believe in “American Exceptionalism”. To me, however, this exceptionalism is more about the extra-territorial obligations that come with being the world’s strongest economy, military, and reserve currency, than an heir of hubris which precludes considering the experiences of other countries when drafting policy. But that’s just my opinion.

Debt Sustainability, MMT, and Context Sensitive Macroeconomics:

The issue of debt sustainability, however, is far less subjective. America’s relatively high growth rates, and historically low interest rates (thanks to central bank independence and a sterling history of honoring our debts), make stimulus spending both feasible and fiscally responsible.

I am not fully sold on the merits of Modern Monetary Theory (MMT), it seems too radical to me. I am, however, a proponent of context sensitive macroeconomics; expansionary fiscal policy (stimulus spending) is appropriate now, but may not always be. However, the temporal nature of democratic politics makes offering future deficit reductions in exchange for stimulus spending, impracticable (which is unfortunate, as this approach is just what the doctor ordered). 

Government spending need not take the form of “paying people to dig holes and then refill them”, a picture anti-government proponents love to paint. There are glaring infrastructure weaknesses that pose serious problems from both public safety and economic perspectives.

Furthermore, in the current context, government spending would not “crowd out” private investment. In fact, if properly enacted, stimulus spending should increase private spending. Governments around the world are increasingly embracing public private partnerships (PPP)–leveraging public money to raise private funds when it serves both sectors interests (such as infrastructure spending, job training, etc).

Corporate cash hording, despite very low interest rates, suggests that private companies are able and would be willing to spend more if either a) the government contributes funding (PPP), or b) aggregate demand increased (which in the short run can be catalyzed either by increasing government spending, or by putting more money in the hands of those with the highest marginal propensity to consume–poorer people).

Of course, there are limits to what stimulus spending can achieve. The “multiplier” effect of a stimulus program depends on the necessity, targetability, efficiency, and accountability of its components. Beyond government spending, major policy changes, such as tax reform and minimum wage increases, are also desperately needed.

Liberal economic policies in the U.S. cannot fix the world’s problems, but they can increase American growth, set our economy up for higher future growth rates, and rekindle “The American Dream”. The U.S can lead both by action and example, serving as a model for other countries to emulate as best they can.

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