Normative Narratives


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Economic Outlook: Fiscal Policy, Monetary Policy, and the Zero Bound

Paul Krugman does a nice job of explaining why unprecedented monetary expansion (“quantitative easing”) has not really moved the needle in terms of reducing unemployment and increasing aggregate demand.

It would be prudent to remind the reader that there has been very little counterfactual analysis of the Feds policies since the Great Recession began (that I am aware of). The situation would almost certainly be worse, higher unemployment and deflation, had the Fed failed to act in the way it is. If you would like to read further on the downward spiral of debt, austerity and deflation in a depressed economy, Irving Fischer wrote on the subject following the Great Depression in a way that is both easy to understand and still as relevant today (perhaps even more-so given how much less politically charged expansionary monetary policy is post-gold standard).

A liquidity trap is a situation when slashing interest rates on government bonds to near zero percent is insufficient to provide enough credit to allow the economy to produce at full productive capacity. Investors would rather invest in safe government assets with almost no yield then invest in private markets.

I believe a liquidity trap is in itself justification for expansionary fiscal policy. It is basically investors saying to the government, “here, we don’t want to invest our money, so do it for us and just promise to pay us back in the future, don’t even worry about the interest”. But fiscal policy, which originates in the House of Representatives, is politically charged (especially when a government is already highly indebted, then every spending program comes under close scrutiny).

Monetary policy, on the other hand, is much more politically isolated. It originates within the Federal Reserve, which is staffed with economists who understand economics better than politicians. The Fed began by cutting rates, hoping to stimulate aggregate demand.

Once this conventional monetary policy failed, unconventional means were taken; the Fed is buying assets on a large scale, expanding the monetary base. The Fed has pledged to continue to pursue expansionary monetary policy by buying assets on a monthly basis until either the unemployment rate falls below a certain level (I believe 6.5%) or inflation rises above a certain level (I believe 2%).

The Fed made this announcement to try to change people’s expectations. Since you cannot cut nominal interest rates below zero percent (the “Zero Lower Bound”), the Fed hopes to stimulate demand by making people think that in the future inflation will be higher than it is now. If money is worth less in the future, then people will want to spend it now while it is worth more. More spending stimulates the economy and reduces unemployment.

So why has this policy been ineffective? Well, as I said before, I am not so sure it has been—certainly the situation would be worse right now, not only for America but for the rest of the world which overwhelmingly relies on dollars for international transactions.

But as to why expansionary fiscal policy would be unquestionably more effective, Professor Krugman hits the nail on the head:

“I’m not claiming that there is nothing the central bank can do; but as I’ve tried to explain before, monetary policy can, for the most part, gain traction under current circumstances only by changing expectations about future actions (and changing them a lot). Meanwhile, fiscal policy has a direct, current effect on the economy, which easily trumps attempts to move the economy by changing the Fed’s messaging.

Sorry, guys, but as a practical matter the Fed – while it should be doing more – can’t make up for contractionary fiscal policy in the face of a depressed economy.”

Think of beginners national income accounting, where aggregate demand (Y) = C (consumption) + I (investment) + G (government spending).

Fiscal policy can stimulate AD directly by increasing either G, C, or I depending on how the program is designed.  Monetary Policy, on the other hand, has a much less direct effect. It tries to incentivize people to act a certain way (increase C or I), but people do not always act “rationally” in the economic sense. Sometimes people are so risk averse that even reducing the yield on an investment does not reduce the demand for this investment (particularly in times of economic uncertainty, when I would argue investors tend to become more risk averse).

Also, there is inherently less scrutiny in exactly how monetary policy works. While it is true that some portion of fiscal expansion may be used inefficiently, it is much more tractable than monetary policy.

Monetary policy stimulates AD, but it can also feed into financial bubbles. By providing low interest loans to banks, the Fed is making a leap of faith that the money will be spent wisely. The money should be going to helping people restructure underwater mortgages, or generally providing low cost financing, freeing money for people to spend and stimulate demand. And to a certain extent it is does, but it can just as easily be spent in other less egalitarian ways. If this money goes to Wall St.  investments, the gains will be realized almost entirely by the wealthy.

Evidence exists that this is happening—unemployment remains stuck while financial markets have reached record highs. Securitization, which became taboo after the financial crisis hit, has began to become common practice again. Without meaningful financial reform, the Feds policies could be fueling the next asset bubble.

The Fed has maintained it is keeping a close watch on how its money is being spent, and given the suffering caused by the Great Recession I’m sure it is, but there is only so much it can do. The Fed cannot possibly micromanage how all of its “cheap money” is being spent. The Fed could try to only lend to more people-friendly institutions, such as “credit unions”, or establish mechanisms to lend directly to people and small businesses, but up until this point has either has not or cannot do so (either due to its mandate or due to insufficient manpower for such oversight).

So expansionary monetary policy has kept the recovery from not being worse than it is (or not being a recovery at all), but it has predictably fallen short of its intended goal. It needs to be complimented by expansionary fiscal policy. That’s not to say that there are no inefficient programs that can be made to more efficient–there almost assuredly are. The stimulus-advocate policymaker should have concrete examples of how resources can be used more effectively, if he has any hopes of convincing his austerity minded counterpart of coming to an agreement. Policy, like markets, requires both competition and coordination to be made as efficient as possible.

The Fed should not reverse course now, but should ensure proper oversight for its policies. The Federal government, on the other hand, seems to be slowly moving from austerity to stimulus. Will common sense and text-book macroeconomics prevail, or will business as usual continue? Only time will tell.

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Conflict Watch: U.S. and its Allies Believe Assad Used Chemical Weapons (But What Does it Mean?)

A little mix-up from our normal schedule. When I saw this article in the NYT this morning I could not concentrate on any economics related news, I will put something out on that front tomorrow.

“The White House, in a letter to Congressional leaders, said the nation’s intelligence agencies assessed “with varying degrees of confidence” that the government of President Bashar al-Assad had used the chemical agent sarin on a small scale.

But it said more conclusive evidence was needed before Mr. Obama would take action, referring obliquely to both the Bush administration’s use of faulty intelligence in the march to war in Iraq and the ramifications of any decision to enter another conflict in the Middle East.”

Senator Dianne Feinstein, Democrat of California, who is chairwoman of the Senate Intelligence Committee, said the agencies actually expressed more certainty about the use of these weapons than the White House indicated in its letter. She said Thursday that they voiced medium to high confidence in their assessment, which officials said was based on the testing of soil samples and blood drawn from people who had been wounded.”

“In a statement last summer, Mr. Obama did not offer a technical definition of his “red line” for taking action, but said it was when “we start seeing a whole bunch of weapons moving around or being utilized.” In Jerusalem last month, he said proof that Syria had used such [chemical] weapons would be a “game changer” for American involvement.”

“The timing of the White House disclosure also suggested the pressures it is facing. It came the same day that the British government said that it had “limited but persuasive” evidence of the use of chemical weapons, and two days after an Israeli military intelligence official asserted that Syria had repeatedly used chemical weapons.

In a letter to the United Nations secretary general, Ban Ki-moon, several weeks ago calling for a United Nations investigation, Britain laid out evidence of the attacks in Aleppo and near Damascus as well as an earlier one in Homs.

The letter, a copy of which was obtained by The New York Times, reported that dozens of victims were treated at hospitals for shortness of breath, convulsions and dilation of the pupils, common symptoms of exposure to chemical warfare agents. Doctors reported eye irritation and fatigue after close exposure to the patients.

Citing its links to contacts in the Syrian opposition, Britain said there were reports of 15 deaths in the suburban Damascus attack and up to 10 in Aleppo, where the government and rebels have each accused the other of using chemical weapons.”

“White House officials gave no indication of what Mr. Obama might do, except to say that any American action would be taken in concert with its allies.

While lawmakers from both parties swiftly declared that the president’s red line had been breached, they differed on what he should do about it.”

And I honestly could have quoted the whole article; I highly suggest you read it if you are interested in this matter (and if you made it this far you are, so go read it).

Before I dive into the article, a little background on why chemical warfare is different from conventional warfare. “Chemical warfare is different from the use of conventional weapons or nuclear weapons because the destructive effects of chemical weapons are not primarily due to any explosive force.”

This means that chemical weapons can be detonated without the natural warning that conventional and nuclear weapons carry (the explosion). Chemical weapons can be silent, indiscriminate killers, and have the potential to cause mass destruction (yes chemical weapons are considered weapons of mass destruction).

The U.S. unilaterally denounced the use of chemical weapons in 1969, ratified the Geneva Convention in 1975, and ratified the Chemical Weapons convention in 1997. The U.S. has put a lot of effort into winding down chemical weapon stockpiles both at home and abroad. These are just some of the reasons why a small number of deaths (around 25), in a civil war that has claimed over 70,000 lives, is a “red line” issue.

Why, after appearing to have his “red line” crossed, is the Obama administration’s response unclear?

Most immediately, I would think of the shortcomings of conventional warfare. The Iraq war was costly, and recent sectarian violence in Iraq shows how unsustainable “nation building” can be (if it is imposed from the outside, accompanied by war, or generally pushed in an unrealistically small time-frame; the process of democratization and modernization is gradual and must come from a countries own citizenry).

There also needs to be concrete proof that Assad used these weapons. There are some who would argue that the opposition has reason to use chemical weapons. If the opposition made it appear that Assad used the weapons, it could tip the fight in its favor. While this is a morally reprehensible thought, “all is fair in love and war”. Realistically it is unlikely that the Syrian opposition, which has been hampered by an arms disadvantage throughout the 2 year civil war, has access to such weapons, even if it wanted to use them to draw outside support. Still, this unlikely scenario must be ruled out before the U.S. gets further involved in the war.    

The Obama administration has said any response would be carried out in coordination with our allies—good! But how much of the response is going to fall on the U.S? France and Britain have been particularly outspoken about EU intervention in Syria. However, a recent article highlights that U.S. military expenditure accounts for about 75% of the NATO budget. The U.S. may want its allies to take a larger role, and our allies may want to take a larger role, but unless leaders can push military expansion in a time when austerity has constrained spending even on important social programs (which I am not certain is the right thing to do or should be these countries top priority given constrained resources), it looks like America will likely be footing most of the cost of any coordinated effort.

But let us not forget our recent $10 billion arms deal with Israel, Saudi Arabia and the United Arab Emirates. The stated purpose of such a deal was to deter a nuclear Iran, but such geopolitical allies would almost certainly have to play a significant role in any coordinated effort to support the Syrian opposition militarily.

Also, Russia and China, Syria’s two largest allies who have continually blocked UNSC intervention, have signed the Chemical Weapons Convention banning the use of chemical weapons. If there is evidence Assad used these weapons, China and Russia may allow a UN military intervention, ending an international stalemate almost as old as the war itself.

If allies in NATO, the Middle-East, and around the world (UN intervention) pitch in, the situation in Syria could change swiftly and drastically.

There are no easy answers. I would be shocked if the U.S. attempted unilateral and conventional warfare in response to this news (they have explicitly stated they won’t so I’m not exactly going out on a limb with that prediction). Likely, if it is confirmed that Assad indeed used chemical weapons, the U.S. and its allies would for the first time supply military aid to the opposition. NATO and strategic allies in the Middle-East would likely take up the majority of any ground forces deployed.

It will be interesting to see how this recent news plays out. The Syrian civil war has been stuck in a “hurting stalemate”, perpetuating a humanitarian crisis and causing regional instability. It appears that there may finally be evidence that demands multilateral international intervention that ultimately ends the war.

And when the war does end, a whole new host of issues will emerge…

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Transparency Thursday: As the Debris Settles, Answers from the West Fertilizer Co. Plant Explosion

In a week of news dominated by the act of domestic terror at the Boston Marathon, another tragic event struck our nation that received comparatively little press. I am referring to the explosion at the West Fertilizer Company plant in West, Tex, which killed 10 firefighters and at least 4 civilians:

“In the moments after a fire broke out at a fertilizer plant here last week, some of the volunteer firefighters and other first responders who rushed to the scene appeared to have known that there were tons of dangerously combustible ammonium nitrate inside, but others did not”

The uncertainty over who was aware of the chemical at the plant and who was not, both at the site and in Washington, illustrates the patchwork regulatory world the plant operated in and the ways in which it slipped through bureaucratic cracks at the federal, state and local levels.

One week after the blast, investigators were still not sure how much ammonium nitrate was stored there, whether it had been stored properly and which agencies had been informed about it — even though a host of federal, state and local officials were responsible for regulating and monitoring the plant’s operations and products.”

“Many safety decisions — including moves in recent years to build homes, schools and a nursing home not far from the decades-old plant — were left to local officials who often did not have the expertise to assess the dangers. And the gaps in the oversight of the plant and a paper trail of records have left the essential question of how and why the ammonium nitrate ignited a mystery.

The explosion was so powerful it leveled homes and left a crater 93 feet wide and 10 feet deep. Judging by the size of the crater and the extent of the damage — pieces of twisted metal landed in distant pastures, and ceiling tiles and lights shook loose in buildings two miles away — the explosion was more powerful than the Oklahoma City bombing, experts said.”

When a tragedy like this occurs, it is natural to ask ourselves “could this event, and the pain and suffering it has caused, have been avoided?It seems pretty clear, from the evidence surrounding the explosion and the policies in place that it could have been.

It is fairly obvious that the explosion was caused by the presence of this chemical, which was not produced at the plant but merely sold there. In an attempt to make extra money selling a potentially dangerous chemical, countless lives were put in danger, ultimately resulting in 14 deaths.

 “The blast crater is in the part of the plant where the ammonium nitrate was stored, the official said, though investigators do not yet know exactly how much of it was there at the time or how the storage bins were configured.”

It is evident that there were oversights at the local, state, and federal level which allowed for this event to unfold.

“Under the Emergency Planning and Community Right-to-Know Act, the plant is required to send an annual report detailing the hazardous chemicals it keeps on site to three state and local groups — the Texas Department of State Health Services, the local fire department and a group of county emergency officials known as the Local Emergency Planning Committee.“

“After the Sept. 11 attacks, Congress passed a law requiring plants that use or store explosives or high-risk chemicals to file reports with the Homeland Security Department so it can increase security at such facilities. That requirement includes any plant with more than 400 pounds of ammonium nitrate, but a Homeland Security official said that West Fertilizer had not filed such a report, even though it had 1,350 times that amount. The plant is not on the department’s list of 4,000 facilities with high-risk chemicals, and one official said it might have been placed on that list if it had filed a report.“

West Fertilizer Company, which operates the plant, has a decades-long rap-sheet of compliance problems with Texas environmental rules, and has not been inspected by federal regulators in since 1985:

The plant was last inspected by OSHA in 1985. At the time, according to records obtained by the Associated Press, OSHA cited the plant for improper storage of anhydrous ammonia and fined it $30; OSHA could have imposed a fine of as much as $1,000. OSHA also cited the plant for violations of respiratory protection standards, but did not issue fines.”

A fine of $30 dollars, 28 years ago, hardly seems like much of a deterrent. A recent report suggests that damage caused by the plant will exceed $100 million dollars.

The question now is going forward, who should be held responsible for this preventable tragedy so that future tragedies can be prevented?

There is certainly a strong case to be made against regulators at the local, state, and federal level, as well as the owners of the West Fertilizer Company Plant.

A number of lawsuits have already been filed against Adair Grain Inc., which owns the plant, of negligence which led to the explosion. It can only be assumed that as more facts present themselves, more suits will be filed.

Should any government regulators, whose negligence allowed this tragedy to take place, be held accountable? What about local elected officials who allowed schools and hospitals to be built so close to a potentially dangerous site? In what ways will those who are held accountable be charged? Will it be merely financial compensation, or will someone be held accountable for the human suffering caused by the explosion?

Sound off people; a tragedy like this could happen anywhere without competent regulatory oversight.

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Conflict Watch: Arm the “Good Guys”, Disarm the “Bad Guys”

On April second, the U.N. passed a historic Arms Trade Treaty:

“The U.N. assembly voted 154 in favor of the treaty, three against and 23 abstentions (U.N. officials said the actual vote should have been 155-3-22; Angola was recorded as having abstained, though it had attempted to vote yes.) Iran, Syria and North Korea cast the sole votes against the treaty.

Major arms producers China and Russia joined Bolivia, Nicaragua and India — the world’s largest importer of arms — in abstaining. Significantly, the United States reversed its decades-long policy of opposition to such measures and voted in favor of the treaty.”

There are questions as to whether the vote will pass the senate, as the gun lobby in America is expected to fight it tooth and nail (even though a direct stipulation of Obama’s support was that the treaty would not undermine second amendment rights, but the gun lobby in this country has proven itself to be amazingly resilient to facts and policy wording).

The treaty centers on human rights abuses. It requires arms deals to be reviewed based on the recipient of the weapons. If the recipient has a questionable human rights background, or there is any evidence the weapons may be used to perpetuate human rights violations, the deal will be deemed in violation of the treaty.

Regardless of U.S. passage, the treaty is a good thing. The U.S. has proven to be quite reserved with its weapons sales to questionable recipients, evidenced by the fact that we still will not provide arms to the Syrian opposition. “’We [the U.S.] license all imports and all exports of weapons, and we monitor where they’re coming from and who they’re going to when we’re in the business of exporting them externally.’

In a sense, the treaty attempts to bring the rest of the world up to this “gold standard” of trade control.”

While it would certainly strengthen the treaty to have the world’s largest arms exporter on board, it is not a make or break vote. If the NRA and gun lobby in America really want to throw their support behind Iran, Syria, and North Korea, so be it—it would truly highlight how backwards and irrational such organizations are.    

Syria is in a civil war, and North Korea has regularly threatened nuclear strikes on America and its allies. Iran is a suspected hub for destabilizing arms trade throughout the African continent. The fact that these 3 countries are the only ones who voted no to the treaty should tell you something about the level of support the treaty has globally.

This effort to take weapons out of the hands of “bad guys” has been bolstered by America’s decision to sell weapons to the “good guys”:

“The Defense Department is expected to finalize a $10 billion arms deal with Israel, Saudi Arabia and the United Arab Emirates next week that will provide missiles, warplanes and troop transports to help them counter any future threat from Iran.”

“The objective, one senior administration official said, was “not just to boost Israel’s capabilities, but also to boost the capabilities of our Persian Gulf partners so they, too, would be able to address the Iranian threat — and also provide a greater network of coordinated assets around the region to handle a range of contingencies.”

Those other security risks, officials said, include the roiling civil war in Syria — a country with chemical weapons that could be used by the Assad government or seized by rebels — and militant violence in the Sinai Peninsula.”

The U.S. has bolstered its military capacity in Asia and put pressure on China to counter the North Korean threat. It has signed the UN ATT in an attempt to help keep arms out of the hands of human rights violators and terrorists. It has doubled down on its strategic presence in the Middle-East by further arming its allies in the region.

The U.S. arms deal with Israel, Saudi Arabia and the United Arab Emirates may also be an attempt to show how the treaty works, based on its timing. Weapons manufacturers need not fear that their sales will drop due to the treaty—as long as weapons are going to responsible recipients, the treaty has been in no way violated.  

I like this two sided approach to helping ensure global security. The shortcomings of overt military action have been highlighted by “the war on terror”. America must rely on its strategic allies, as well as Europe, in order to ensure global security in a financially sustainable way—the U.S. simply cannot afford to continue playing “Team America, World Police”.

Obama has continued to impress with his foreign affairs record. He is following Teddy Roosevelt’s famous words “speak softly, and carry a big stick”, with the added provision that he will also supply big sticks to America’s allies and do his best to take big sticks away from our enemies.

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Economic Outlook: “American Winter”`

Yesterday a friend of mine, Adam Blejer, pointed me towards an HBO documentary, “American Winter”. He thought, rightfully so, that the message conveyed in the documentary was one that I may be interested in and have some insight on. Always eager to learn from my followers and get them involved, I looked into the documentary.

I should say now that I was unable to actually watch the documentary, as I do not have HBO on demand. What I was able to do was read the summary of the documentary by the producer, which can be found here. This actually helped me analyze the documentary more clearly for two reasons. One, I have the meat and potatoes of the documentary spelled out in front of me, I did not have to watch and take notes or worry about missing anything, it is all there for me to go back and check on. Second, I was able to see the underlying argument without getting emotionally wrapped up in the struggles of the people in the documentary. This would have made an unbiased critique difficult if not impossible.

Without further ado, an analysis of the documentarian’s message:

The first thing I analyzed was any message conveyed based on economic indicators. In the first paragraph, I saw something that could not look right. “Yet 46% of this country is living in poverty, or near poverty, and today we have the highest number of poor since we began keeping records.” This is a slight of word, as the official U.S. poverty rate as of 2011 was 15%–31% of that 46% may be living “near poverty”, but are not actually living in poverty.

One has to be careful, as poverty rates are based on a benchmark rate; set that rate too high and everyone is in poverty, set that rate too low and some people who are truly struggling to survive will not be counted. The census bureau is very transparent about how they find their numbers; an explanation can be found here. I will leave it up to you to determine whether the numbers are too high or too low, but that 46% was an obvious shock value number—many of those 31% living “near poverty” have much much more than even the “wealthy” in less developed countries.

Which brings me to my next point, about inequality in the U.S.: “The Gini coefficient is commonly used as a measure of inequality of income or wealth and is accepted as a fair method to compare income inequality in different countries.  According to America’s Gini coefficient of 0.450, the U.S. ranks near the extreme end of the inequality scale, comparable with Cameroon, Madagascar, Rwanda, Uganda and Ecuador.  China is significantly more equal than the U.S. with a Gini coefficient of 0.415, and India is leagues ahead of the U.S. on income inequality, with a Gini coefficient 0.368.  Even Russia is less unequal than the U.S., at 0.422 Gini.”

The Gini coefficient ranges from 0-1; the closer to 0 the more equally a countries income is distributed.The .45 number checks out, although it is significant lower once you account for taxes and transfers. There are structural issues that have lead to this inequality; low investment in social programs, preferential tax rates on capital gains and other subsidies which disproportionately go to the wealthy, and the decline of union power are all common examples.

However, there are notorious shortcomings for comparing Gini coefficients between countries. For one thing, the same Gini coefficient for two countries can mean different things. Whenever you aggregate numbers, information gets lost in that aggregation. Also, in some countries such as China and India, the most impoverished experience “extreme poverty”. While relative poverty of course exists everywhere, extreme poverty exists only in the developing world. For these reasons, it is irresponsible to say “The Gini coefficient…is accepted as a fair method to compare income inequality in different countries.” This is far from a consensus amongst academics and policy makers.

Next I examined the ethical argument over the welfare state, the “makers vs. takers” argument if you will. Paul Krugman has done a great job of highlighting how transfer programs tend to amount to inter-generational consumption smoothing; you borrow when you’re young, work and contribute when you’re in the prime of your life, and then retire and take from the system again. This formula has underpinned political economy and tax philosophy for decades if not centuries, and it works. In fact, there is really no alternative that works remotely as well in creating the opportunity for social mobility.

Here’s the filmmakers take on the subject:

“How can nearly half of our country be in such dire circumstances and yet our politicians chose this time of the most need in 80 years to cut budgets and social services all across the country?  It’s because there are such pervasive myths and stereotypes about those families who need help—they are lazy, they are takers, they are incapable, they made bad decisions—so we don’t need to care about them.  But as we made American Winter we found a very different story.  The families who we followed for this film are struggling, yet they are just like our friends, neighbors and members of our own family.  They are hardworking, loving folks who have had a bit of bad luck, a job loss, a health issue, a death of a parent, a handicapped child.  These events have set them back and then life becomes an uphill battle to get back on their feet again.”

This is a problem I tend to have with documentaries, is that they cherry pick information. Certainly some people who need help actually need it temporarily to help them get back on their feet. But you can be equally certain that there are some lazy people who rely on handouts their whole lives, people who “game the system”. It is because people see the world as black and white that it is so hard to work on reforms that can strengthen the welfare state and make it work more effectively. This is why politicians talk past each other, instead of deliberating and debating in order to come to reasonable compromises that work for the American people.

Another issue the summary touches on is the inter-generational nature of poverty; what economists refer to as poverty traps:

“In making American Winter we saw firsthand how stressed and scared these parents are everyday by the prospect of losing their homes, and by the daily struggle to pay their bills.  However, the most overwhelming part was seeing the kids who have lost hope for their future.   These kids see their parents work extremely hard, and the kids say to themselves, “we’re barely getting by everyday, how am I going to make it when I grow up?”  And losing that sense of optimism and hope does not bode well for a child’s future.”

“Studies show that it is cheaper to help families before they become homeless.  And it is cheaper to help families before the kids are traumatized by living with food and housing insecurity, because those kids don’t do as well in school and they are more likely to wind up on drugs or in the prison system.  Those costs to society will affect all of us for ten, twenty, thirty years to come.  Yet even though it is cheaper to help families, to get them to a place where they are stable and productive, we seem to turn a blind eye and tell these families that they are on their own.

Every one of us needs help at some time in our lives.  But the idea that families who need social services are “takers” is one of the most destructive myths of all.  The perception is that our tax system and our government disproportionally helps the less affluent at the expense of the wealthy.  In fact, the U.S. government spends $400 billion a year on tax policies intended to help families save and invest.  In 2010, the wealthiest 5% of taxpayers averaged a net benefit of $95,000 each, while the bottom 60% received an average benefit of $5 each.”

I have written about poverty traps many times here at NN, just search poverty traps in the search bar and you will see in how many different contexts poverty traps exist. I fully agree that it is cheaper and more effective to attack the root causes of poverty before they become a problem. I do not know the methodology the filmmakers use to come to their conclusion, but it fits into a general philosophy I have on the subject; that any money saved in the short run by cutting social programs will be dwarfed by increased future spending in the welfare and penal systems.

So while some of the figures and concepts the documentary pronounces may be a bit stretched (as is common with documentaries, as they are meant to have shock value), the overall message is one that I cannot (and do not wish to( refute. Income inequality is too high in America, and it is this way due to structural flaws in our fiscal and tax policies. Sequestration and other short term budget cuts are like putting a Band-Aid on a gunshot wound, it may stop the bleeding for a little but in the long run the problem will be worse.

Capital gains taxes remain too low, even as they have risen from 15 to 20% following the “fiscal cliff” deal. Joseph Stiglitz explains quite eloquently how this perpetuates financial bubbles and takes talent away from more sustainable fields (such as medicine, teaching, manufacturing; basically anything not associated with capital gains).

Meanwhile, no meaningful financial reform has taken place since the financial crisis. The same concept of “securitization” is beginning to rear its ugly head again. We must learn as a country from our past failures, and demand our elected officials enact policies that our in our best interests as a nation (I have often said that the only special interest group Congress should be worried about is the American people).

It is the job of the American people to hold their elected officials accountable, and vote for the politicians that support the policies that we as a nation know are right (or at least vote against politicians who support policies that have been tried and failed).


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Transparency Thursday: Remembering the Victim’s of the Boston Marathon Bombing–Creating a Legacy of Peace

“This is Martin Richard, 8, who was killed in yesterday’s attack. His sister and mother are critically injured. His message, “No more hurting people–Peace” is something we should all seek to honor, and remember him by.” –George Takei

By now, everybody has heard about the tragic events that unfolded this Monday during the Boston Marathon. Two bombs exploded, killing three people and injuring over 100 more. Today, President Obama Spoke at an interfaith memorial service at Boston’s Cathedral of the Holy Cross:

“Mr. Obama spoke in personal terms about the victims of the bombing and offered prayers for their families. Krystle Campbell, 29, of Medford, Mass., was ‘always smiling,’ he said, noting that her parents were at the service. He said that his prayers were with the family of Lu Lingzi, 23, in China, who had sent her to graduate school at Boston University ‘so that she could experience all that this city has to offer.’ And he spoke about what he called the heartbreaking death Martin Richard, 8, of Dorchester, who was killed in the blast, which also wounded his mother and sister.”

“At a Senate hearing Thursday morning, the nation’s top intelligence official, James R. Clapper Jr., echoed President Obama’s comments earlier this week that the authorities still do not know whether the attack was a foreign or domestic plot, carried out by one or more individuals or a group.”

This tragic event understandably evokes emotional responses from those directly and indirectly affected. In the aftermath of this event, as the details reveal themselves over time, it would be prudent to take a step back and remember some of the ideals America was founded on; tolerance and freedom of speech, a place where no one could be persecuted based on nationality or religion, and where everyone is innocent until proven guilty (due process of law).

I came out with this response to the bombings on Monday:

“Tragedy in Boston. Prayers go out to the families and loved ones affected by this senseless act of violence.

Please do not jump to xenophobia and hatred after this event. Only through cooperation and kindness can events like this be prevented. There is no proof as to who committed this unthinkable act–American, Muslim, or otherwise.

In America everyone is innocent until proven guilty.”

Many people started blaming “muslims”, “terrorists”, or “them” after this attack. Jumping to such conclusions are counter-productive. For one thing, all signs point to this being a domestic terror attack; the sight was not a huge landmark like the W.T.C, and no terrorists organization has claimed responsibility. While it would be irresponsible journalism to say with certainty this was not an act of a foreign terrorist organization, all signs are pointing in that direction.

This message of the preventative powers of peace, kindness and cooperation sound good on paper, but can they actually work in practice? Martin Richard was an 8-year-old boy who believed in these principles,  but are they practical in real life? Beyond the ethical stance, there are economic and social reasons why these normative views can indeed help reduce acts of terrorism. Of course we need security, but security is only one side of the preventative coin. Dealing with the root causes of domestic and foreign terrorism will reduce the number of would be attacks, and allow our security forces to better manage the threats that inevitably will still exist.

First let us examine foreign terrorism. I would like to point you all to an earlier post I made on preventative peace-building and protracted social conflict (PSC). This piece highlights how human rights violations are at the root of most violence in the developing world. Instability creates a foothold for terrorism to operate–when a government is not providing essential services and / or security, terrorist groups can fill the void, essentially buying goodwill. Most people in these countries are aware they are supporting terrorist activities, but if it is a choice between having essential services provided or not, they could care less.

That is why, in order to stop foreign terrorism at its roots, we must empower friendly governments to provide the services and security that they are obligated to provide. Doing this will help push terrorists to the margins, and create lasting alliances in strategic locations. My previous post suggests redistributing money from the D.o.D. to the D.o.S., as overt military action has proven to be an ineffective and costly means of nation building.

Next let us examine domestic terrorism. In America, we are all relatively well off compared to those in the rest of the world. Social programs exist to help protect the human rights of those less fortunate; hopefully drastic cuts in these programs do not take place or else we will see the crime rate go up.

One area that America is notoriously weak in is public mental healthcare access. Mental health issues affect the rich and poor alike, and probably disproportionately affect the poor. As someone who has personally seen their self-confidence and productive capacity bolstered by mental healthcare, I am a strong proponent of providing access to mental healthcare to all Americans.

Obamacare, which is supposed to become effective in 2014, is expected to extend mental healthcare to all Americans. This should help people overcome their issues, lead happier and more productive lives, and ultimately reduce the number of people dependent on the welfare state in the long run. Many people have issues that are fairly common, but due to their socioeconomic standing remain isolated and untreated. It is these people who usually turn to crime, including domestic terrorism. By increasing access to mental healthcare, these incidents will decline.

No policies will ever entirely eliminate terrorism, domestic or foreign. But there are common sense ways to reduce the number of attacks as much as possible, which should allow our security forces to better prevent future acts of terrorism.

Robert Martin did not understand these complex interconnections, he was an 8-year-old boy. It is an honor to be able to provide some theoretical insight into Robert Martin’s normative stance; just because he didn’t understand why he was right doesn’t make him any less right. The best way to reduce terrorism, both domestic and foreign, is to attack it at its roots. The alternative, an increasing reliance on American security forces at home and abroad, has been proven too costly and ineffective.

As Albert Einstien said, “Insanity is doing the same thing over and over again and expecting different results.”

People (generally) respond to violence and hatred with more violence and hatred. People (generally) respond to acts of kindness with humility, gratitude, and friendship. Acts of terrorism represent an intractable vicious cycle; someone can always point a finger and recall past atrocities to justify their actions in their own mind.

In order to move forward as a global community we must look forward and think about what we can do differently, if we hope to break this vicious cycle.


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So Much To Do, And No Time To Do It

Dear Normative Narratives Community,

Unfortunately I will not be able to post my regular weekly updates this week. Between my internship at the UNDP, and my IPED comprehensive exam, there are simply not enough hours this week. After  5 months of regular updates, I probably deserve a break; but blogging has become so enjoyable for me that the only way I would take one is if I absolutely needed to (as I do now).

Hopefully over the past few months you have learned a few things, so that my absence will not to too costly (/sarcasm, I know you will all get on just fine). As for news sources, you should by now realize that 95% of the things I post come from two sources, The New York Times and Reuters. There certainly are other sources out there, but I find these to be the two most consistent sources.

So here is a little homework assignment while I am gone. Check up on news sources and try to apply Normative Narratives thinking to what you are reading. Challenge what the writer is saying. think analytically and critically; progress and change are not made by blindly following but by actively participating in public discourse. Do not be afraid to speak your mind and put you opinion out there, especially on subjects you are passionate about (I know I’m not!) .

I guess what I am saying is that I believe there is an inner blogger/ social commentator / news analyst in all of us. This would be a great time for me to renew my call for guest bloggers–I have not had any so far and really would like to see that change.

Also, there are only 29 days left to contribute towards my advertising campaign. I have already started an ad on Google and it has been working quite well; I would like to continue to advertise as long as possible but unfortunately this costs money. The more I raise, the more I can spread the Normative Narratives message.

Last but not least, be sure to check out my Facebook page, which I will continue to regularly update with stories I believe are important. I will be back to my regular blogging schedule in just one week, April 18th (mark the date on your calendars!!).

I’m sure there will  be lots to talk about between now and then, I look forward to getting back on a regular blogging schedule as soon as possible.

Best,

Ben Zupnick

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Conflict Watch: The Obama Ultimatum


To say North Korea’s recent actions and rhetoric have been anti-American would be an understatement. Within the past few months Kim Jong-Un has launched a nuclear test strike, cutoff phone lines with the U.S. and South Korea, barred South Korean workers from entering an industrial complex bordering the two Koreas, stepped up its military capacity, suggested countries shut down their North Korean embassies for the safety of their diplomats, and vowed nuclear strikes on the U.S. and its allies.

Much of this is just tough rhetoric, a young leader trying to show he can “rule with an iron fist”, that he is able to rebuff “western interests”, and will not have his national sovereignty challenged.

Experts agree that North Korea could not strike the U.S. mainland with nuclear weapons. More immediately at risk would be South Korea, Japan, and other pacific island allied states. This is alarming for the U.S. as well, who operates a close to 30,000 troop force in South Korea. South Korean has responded with it’s own stern warnings to North Korea, that it will “strike back quickly” if the North attacks. Japan has recently begun ramping up its military capabilities partially in response to North Korean rhetoric. Factor in China’s proposed military expansion, and we have a full blown arms race in Asia.

This is not an issue of China versus Japan, as both sides are essentially on the same side. The Chinese government has recently expressed dismay towards its allies in Pyongyang, agreeing in principle to tougher U.N. sanctions after North Korea’s most recent nuclear test strike.

The U.S., seizing onto this opportunity, has proposed what I call “the Obama ultimatum”:

“The Obama administration, detecting what it sees as a shift in decades of Chinese support for North Korea, is pressuring China’s new president, Xi Jinping, to crack down on the regime in Pyongyang or face a heightened American military presence in its region.”

“’The timing of this is important,’ Tom Donilon, Mr. Obama’s national security adviser, said in an interview. ‘It will be an important early exercise between the United States and China, early in the term of Xi Jinping and early in the second term of President Obama.’”

“In Beijing, officials said Mr. Kerry also wants to reinvigorate the dialogue with China on climate change… A week after Mr. Kerry’s visit, Gen. Martin E. Dempsey, the chairman of the Joint Chiefs of Staff, will spend four days in China to try to improve communication between the American and Chinese militaries.”

“’What we have seen is a subtle change in Chinese thinking,’ Kurt M. Campbell, a former assistant secretary of state for East Asian affairs, said in a speech Thursday at the Johns Hopkins School of Advanced International Studies. The Chinese now believe North Korea’s actions are “antithetical” to their national security interests, he said.”

This article seizes on many issues brought up at Normative Narratives involving U.S. and Chinese cooperation on issues concerning the “global commons” (environmental, security, etc.). It also highlights the potential for closer Washington-Beijing relations as two supposedly progressive leaders take the helm of the first and second largest economies in the world.

But there are some issues holding back U.S.-Chinese relations. Issues of trust between the two superpowers exist; cyber-attack accusations have flown from both governments in recent months. Also, there are factions within China who believe it is in China’s best interest to have an anti-Western power in the Korean Peninsula. Some believe that if China came down hard on North Korea, even so far as to push for a reunification of the Korean Peninsula at some point in the future, this would bolster U.S. influence in the region and diminish Chinese influence.

And it is exactly because of this point that I like “the Obama ultimatum”. If China’s greatest fear is increased American military capacity in the Asian Pacific, Obama has just offered Xi Jinping a surefire way to check U.S. military capacity in the region.

Obama has essentially put the ball in Jinping’s court. The next move belongs to China. Will they rebuff the American offer in an attempt to show solidarity with North Korea and protect the interest of “national sovereignty”?

It makes little sense to think they would; when you consider the growth and development of China, there is no question as to which country, between the U.S. and North Korea, is a more important partner. Factoring in Japan’s stance and it makes little economic or military sense for China not to align itself with “western interests”.

Nothing should be taken for granted; historically nations have been known to do things against their economic interests in the pursuit of strengthening their political ideology. But in today’s globalized economy, where the political economy intersection is so prevalent in mainstream political thinking, it would be very surprising to see China not at least attempt to comply with Obama’s offer.

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Economic Outlook: The (Unsuprisingly) Dismal Jobs Report

The jobs report for March came out today, and it was not pretty:

“American employers increased their payrolls by 88,000 last month, compared with 268,000 in February, according to a Labor Department report released Friday. It was the slowest pace of growth since last June, and less than half of what economists had expected.”

“The unemployment rate, which comes from a different survey, ticked down to 7.6 percent in March, from 7.7 percent, but for an unwelcome reason: more people dropped out of the labor force, rather than more got jobs.

The labor force participation rate has not been this low — 63.3 percent — since 1979, a time when women were less likely to be working. Baby boomer retirements may account for part of the slide, but discouragement about job prospects in a mediocre economy still seems to be playing a large role, economists say.”

There are a number of reasons for this dismal jobs report. The most obvious explanation would be the sequester, but this is incorrect. The sequester has not had enough time to work its way through the economy enough to significantly affect unemployment–most economists agree unemployment will spike at the end of the year due to the sequester. The payroll tax holiday expiration is a more plausible cause; part of the “fiscal cliff” deal, the tax increase disproportionately hit low income American’s disposable income starting in January. Both policies compromise aggregate demand (the payroll tax through consumption, sequester through government spending), reducing any incentive businesses might  otherwise have to increase hiring.

 Is it surprising we have had stagnant growth and stubbornly high unemployment given the current conditions? Any economist who understands basic macroeconomics could have predicted the growth-recession that has come to define post-Great Recession America, given the current global economic environment and political gridlock here at home. Paul Krugman, who always seems to focus on the most pertinent indicators and explain complex economic issues in an accessible way, does it again:

“But is this really a surprise? I mean, it’s true that the incipient housing recovery has made many people somewhat optimistic — I’ve been one of them — but when all is said and done, we are following strongly contractionary fiscal policy in an economy in which monetary policy is still ineffective because of the zero lower bound. How contractionary? Look at CBO’s estimates of the cyclically adjusted budget deficit (third column):”

” That deficit has declined from 5.6 percent of potential GDP in 2011 to 2.5 percent in 2013 — that’s 3 percent of GDP, which is a lot of austerity. Not all of that cut has even hit yet — the sequester isn’t in the macro numbers yet — but the rise in the payroll tax is very clearly driving the latest bad numbers, which show big declines in retail.

This is really stupid; as long as we’re at the zero lower bound, austerity is a huge mistake.”

Driving most of this deficit is lower budget revenues, a legacy of the G.O.P.’s failed “starve the beast” theory of governance.

But enough finger pointing. The real issue here is how much austerity has been pushed through (3% of GDP) at a time when the private sector cannot make up the slack of reduced government spending (what the zero lower bound essentially means, that even at a 0% interest rate, the private sector still cannot provide enough capital for the economy to run at full capacity).

How far from full capacity are we? According to the CBO, America has produced under capacity by a large margin since  2009 (-6.8% in ’10, -6.2% in ’11, -5.7% in ’12 and an estimated -5.9% this year). If we multiply those numbers by the GDP of those years, we get this much lost output: $896.24 billion in ’10, $883.28 billion,$ 779.19 billion in  2012. That’s a whopping 2.558 trillion dollars over the last 3 years. If the U.S. government had captured 20% of that in tax revenue, that would’ve been an additional $511 billion in revenue over those 3 years (actually, these numbers are an underestimation, as the GDP gap is based off potential GDP I used real GDP).

Also alarming is that the 2013 projected output gap is supposed to go up, from 5.7% in 2012 to 5.9% in 2013. Not only is our economy recovering, austerity measures are actually pushing the economy in the wrong direction.

There is a large cost to both the government and the people with so much idle production capacity. The government has to pay more benefits and receives less tax revenue, exacerbating the federal deficit. People are sitting idle, their skills are deteriorating, not to mention the psychological effects of long term unemployment.

Once you correct for these automatic stabilizers, the U.S. is basically on a stable fiscal path. Automatic stabilizers are cyclical, they do not have to be addressed by policy as they adjust automatically based on the economy. Low revenue from inadequate taxation is structural, and requires tax reform. Spending on social programs and government employment did not get us into our current problem, and cutting these programs will not get us out of it–it will actually dig us into a deeper hole.

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Transparency Thursday: Wal-Mart, a Microcosm of the U.S. Economy

Walmart is the nation’s largest retail employer. Walmart’s competitive advantage is no secret; by providing goods at prices lower than competitors, it has been able to capture market share by driving competitors out of business. This translates into savings for customers. But looking further into the specifics of how Walmart keeps its costs down, it may also translate into higher costs for consumers in the long run. As is often the case, the “devil is in the details”.

Take, for example, the fact that Wal-Mart systematically underpays their employees. The average Walmart associate makes $15,500 per year ($8.81 per hour). Walmart’s CEO Mike Duke will bring home over $23 million in salary and performance based benefits in 2012, a whopping 1034:1 CEO to employee pay ratio (by far the highest, the next being Target at 597:1, also this figure is based on a median Wal-Mart salary of $22,400, so based on which figure you use the ratio could be much higher). It is estimated that it would cost Wal-Mart shoppers on average another $0.46 per visit to if the company offered a minimum wage of $12 / hour.

On the flip side of this, it costs the nation an estimated $1 billion a year in social safety net use. Essentially, the U.S. taxpayer is subsidizing Walmart’s  low wages, which systematically produce full-time workers living below the poverty line.

Next, consider environmental degradation. One common way to keep costs down is through “supply chain fractionalization”, producing certain products in low wage countries. This leads to increased greenhouse gas emissions, as goods are transported all over the world; without a system of taxing carbon, nobody pays for these emissions. “In the U.S. Walmart’s reported emissions grew by roughly 7% between 2005-2009. In Asia, its greenhouse gas emissions have doubled. The company expects 13 million metric tons of cumulative growth in emissions by 2015”. For all the lip service Walmart pays to environmental sustainability, this amounts to little more than a PR move.

Supply chain fractionalization—or outsourcing—has cost the U.S. an estimated 196,000 jobs from 2001-2006 due to Chinese Imports. This number has probably continued to grow, and represents jobs lost to production in other countries (outsourcing), and smaller domestic firms who were priced out of the market by Walmart’s business practices.

How is Walmart a microcosm of the current U.S. economy? This issue is highlighted in a recent New York Times article. According to the article, “Walmart, the nation’s largest retailer and grocer, has cut so many employees that it no longer has enough workers to stock its shelves properly, according to some employees and industry analysts.”

“Labor groups and some employees say the low staffing levels are hurting the in-store experience.”

Like America in general, Walmart appears to be producing under capacity because of it’s reluctance to hire workers.

In an attempt to save money, Walmart has undermined consumer confidence in its produce—one of the bulwarks of Walmart’s profitability (“Grocery made up 55 percent of Walmart’s United States sales in 2012”). Does the concept of low consumer confidence sound familiar? It should, it is one of the things depressing aggregate demand and is related to stagnant wages, unemployment, and general pessimism of peoples belief in the economy.

“Before the recession, at the start of 2007, Walmart had an average of 338 employees per store at its United States stores and Sam’s Club locations. Now, it has 281 per store, having cut the number of United States employees while adding hundreds of stores.”

Walmart has undermined its consumer confidence, which threatens to hurt its bottom line in the long run (it has not in the short run, which I will address shortly). However, when questioned about the possibility of hiring more workers, “Ms. Scott [a manager at a Los Angeles Walmart] says she has pushed for additional staff or for more hours for existing staff, ‘and the answer that I receive is they want to focus on productivity with the workers that we do have.’”

Does this sound eerily familiar to an overall justification for stubbornly high unemployment in the U.S.? It should. Corporations (including Walmart) are sitting on record profits, yet have not increased hiring to post recession levels. Compounding the issue is that employee productivity and wages have diverged greatly. Employers, Walmart being the largest, are systematically relying on higher worker productivity to make up for a smaller labor force, with no inclination that the higher productivity they seek will result in higher wages.

Walmart, like many other large corporations, is answerable to its stockholders and high level executives. Executive pay is incredibly high, profit’s continue to rise, and stock prices are now well above their pre-recession levels. With all this positive reinforcement, why would Walmart change its practices?

Ultimately, market forces determine the success of a business. No-one is forcing people to shop at Walmart, they go there for low prices and good selection. However, there are systematic issues with how Walmart keeps its costs down—most notably paying low wages and increasingly relying on practices which damage the environment.

Some of these issues, such as minimum wage and environmental regulation, need to be addressed by government policy. People need to be aware of the facts, so they can vote for policies that hold large corporations responsible for the negative externalities they cause. More immediately, people can vote with their wallets, by shopping at Wal-Mart’s competitors (which, based on the breadth of their operations, can include almost all retailers).

If Walmart can post hundred-billion dollar profit margins, and pay its CEO over 1000x the median employee salary, it can afford a more sustainable and egalitarian business model. Walmart’s primary competitive advantage is taking advantage of economies of scale—there is nothing wrong with this. However, cutting corners in other ways unfairly shifts the burden of Walmart’s costs onto taxpayers and the environment. If Walmart’s profits begin to fall, they will rethink their corporate strategy. Until then, we can expect business as usual.

For the sake of it’s own profitability and the U.S. economy, Walmart should hire more workers at more livable wages.

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