Normative Narratives

Monthly Archives: January 2014


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Economic Outlook: Executive Orders and Prison Reform

People in Prisons and Jails for Drug Offenses

The “Prisoners Paradox“–the idea that longer prison sentences, as opposed to their stated goal of deterring crime, actually perpetuate a criminal culture, has been a recurring theme here at Normative Narratives.

Their are undeniably certain instances where criminals pose a danger to society and must be kept behind bars. However, since stricter drug laws were enacted in the 1980s, U.S. prisons have filled up with largely non-violent offenders.

Keeping people in prison has obvious direct costs (as of 2010, the average cost for an inmate in a state prison was $31,246/yr; federal inmate was $28,284). According to the ACLU, with only 5% of the world’s population, the U.S. has 25% of the world’s prison population. In America, Prison is big business.

Further perpetuating this Prison-Industrial Complex is a plea-ultimatum offered to those accused of drug related crimes. According to a Human Rights Watch report, many drug offenders are “coerced” into a plead guilty to a crime, under threat of a harsher punishment if the case goes to trial:

Federal prosecutors routinely threaten extraordinarily severe prison sentences to coerce drug defendants into waiving their right to trial and pleading guilty, Human Rights Watch said in a report released today. In the rare cases in which defendants insist on going to trial, prosecutors make good on their threats. Federal drug offenders convicted after trial receive sentences on average three times as long as those who accept a plea bargain, according to new statistics developed by Human Rights Watch.

Prosecutors favor mandatory sentences because they enhance their leverage not only to get convictions via pleas, but to get defendants to cooperate with the government in the prosecution of others in exchange for a lower sentence.

“Going to trial is a right, not a crime,” Fellner said. “But defendants are punished with longer sentences for exercising that right.”

“Independent federal judges who have no personal or institutional stake in the outcome should have the final say over sentencing,” Fellner said. “Judges should have the discretion to ensure that defendants in drug cases receive sentences proportionate to their crimes, not their willingness to plead guilty.”

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Of more interest to social scientists–and at the core of the “Prisoners Paradox”–are the social and communal effects of incarceration. Incarceration causes skills to atrophy and carries a social stigma; many ex-cons cannot find honest work and end up back in jail. Incarceration robs children of a parent. Children growing up in single-parent households are much more susceptible to a wide array of social issues.

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One could not watch President Obama’s State of the Union address this Tuesday without hearing about “Executive Orders”. One example of an Executive Order which could have profound fiscal and socioeconomic benefits would be clemency for non-violent drug offenders:

 The Obama administration, in its effort to curtail severe penalties in low-level drug cases, is taking the unprecedented step of encouraging defense lawyers to suggest inmates whom the president might let out of prison early.

Speaking at a New York State Bar Association event Thursday, Deputy Attorney General James M. Cole said the Justice Department wanted to send more names to White House for clemency consideration.

“This is where you can help,” he said, in remarks the Justice Department circulated in advance.

Prison officials will also spread the word among inmates that low-level, nonviolent drug offenders might be eligible to apply for clemency.

The clemency drive is part of the administration’s effort to undo sentencing discrepancies that began during the crack epidemic decades ago.

“There are more low-level, nonviolent drug offenders who remain in prison, and who would likely have received a substantially lower sentence if convicted of precisely the same offenses today,” Mr. Cole said. “This is not fair, and it harms our criminal justice system.”

Testifying on Capitol Hill on Wednesday, Attorney General Eric H. Holder Jr. said the Bureau of Prisons now eats up 30 percent of the Justice Department’s budget, which strains the department’s ability to do other law enforcement missions.

Last August, Attorney General Eric Holder urged judges to consider less harsh sentences for non-violent drug offenders going forward. The clemency push is an important retroactive decision, which can ensure those who committed a crime “at the wrong time” don’t continue to face indefensibly long prison sentences.

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One can already hear the criticisms now; President Obama, friend of the criminal! President Obama, defender of the lazy drug user! However, many people convicted of drug-related offenses experience injustice throughout the criminal justice system–from arrest, to trial, to sentencing. Letting criminals out of jail will not solve all of our problems. However, keeping people unjustly locked up for long periods of time has certainly perpetuated lingering socio-racial issues in America.

Clemency is not meant to undermine personal accountability; people need to suffer negative consequences for socially unacceptable behavior or there is way of deterring such behavior. What clemency and a reworked criminal justice system can accomplish is proportionality–ensuring that once someone “has learned their lesson”, they do not remain incarcerated to the detriment of all involved (except, I suppose, those who run the prison).

If there is a policy that will reduce the governments prison bill and may reduce future dependence on government welfare spending–without compromising the security of law abiding Americans–do we not owe it to ourselves as a country to pursue such a policy?


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Transparency Report: Republicans Oppose U.S. Law Targeting Offshore Tax Dodgers

Original Article:

At its winter meeting in Washington, the RNC approved by voice vote a resolution in favor of abolishing the 2010 Foreign Account Tax Compliance Act (FATCA), set to take effect in July, marking the party’s first explicit attack on the law.

FATCA will require most foreign banks and investment funds to report to the U.S. Internal Revenue Service information about U.S. customers’ accounts worth $50,000 or more. The law was enacted after a scandal involving Americans hiding assets in Swiss bank accounts to dodge U.S. taxes.

Critics have blasted the law as an unfair government overreach and invasion of financial privacy.

“The Republican National Committee … urges the U.S. Congress to repeal FATCA,” said the measure, staking out a campaign position ahead of 2014’s mid-term elections.

Tax watchdog groups that support FATCA slammed the Republican vote. “It is mind-boggling that a major political party would even consider endorsing a resolution to facilitate tax evasion,” said Heather Lowe, director of government affairs at anti-graft watchdog group Global Financial Integrity.

“Repealing the law would cripple the U.S. and global efforts to fight offshore tax evasion,” she said in a statement.

The Center for Freedom and Prosperity, a group that advocates for lower taxes and financial privacy, praised the RNC vote. “The GOP’s adoption of FATCA repeal to its platform is a major victory for taxpayer privacy rights,” said the center’s Director of Government Affairs Brian Garst.

Repeal is unlikely and the issue was not expected to resonate with average U.S. voters, said lobbyists on both ends of the political spectrum. But they said Republican opposition to the law could help the party raise campaign funds.

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It is certainly mind-boggling that a major political party would endorse such a view. And even if a repeal is unlikely, this issue should “resonate with the average U.S. voter”. In an era of constant budget-battling and debt-ceiling standoffs (the next one is right around the corner), where stimulus spending is unthinkable and welfare programs are constantly coming under attack (even though both are extremely important during an economic recovery), it is important for Americans to understand the main drivers of U.S. government debt. Once you understand these main drivers, it is obvious why this G.O.P. position on FATCA is unconscionable.

A quick simplified lesson: There are two sides to government debt, receipts (tax revenue) and outlays (spending). While there are certain drivers of long-term spending which must be reformed (social security, and medicaid, and defense spending specifically), these long term issues have little to do with economic recovery fiscal policies (government stimulus spending and “automatic stabilizers“).

A few historic graphs from the White House Office of Management and Budget (full tables from 1938-2012 can be downloaded: reciepts_endpenditure_history, reciepts_by_source) tell the story of U.S. government debt.

RECEIPTS, OUTLAYS, SURPLUS/DEFICIT(–)% GDP | PERCENTAGE COMPOSITION——————————————————————|  OF RECEIPTS BY SOURCE
Year GDP (in billions of dollars) Total Individual Income Taxes Corporation Income Taxes
Receipts Outlays Surplus or Deficit (-)
1992 6,242.0 17.5 22.1 -4.7 43.6 9.2
1993 6,587.3 17.5 21.4 -3.9 44.2 10.2
1994 6,976.6 18.0 21.0 -2.9 43.1 11.2
1995 7,341.1 18.4 20.6 -2.2 43.7 11.6
1996 7,718.3 18.8 20.2 -1.4 45.2 11.8
1997 8,211.7 19.2 19.5 -0.3 46.7 11.5
1998 8,663.0 19.9 19.1 0.8 48.1 11.0
1999 9,208.4 19.8 18.5 1.4 48.1 10.1
2000 9,821.0 20.6 18.2 2.4 49.6 10.2
2001 10,225.3 19.5 18.2 1.3 49.9 7.6
2002 10,543.9 17.6 19.1 -1.5 46.3 8.0
2003 10,980.2 16.2 19.7 -3.4 44.5 7.4
2004 11,676.0 16.1 19.6 -3.5 43.0 10.1
2005 12,428.6 17.3 19.9 -2.6 43.1 12.9
2006 13,206.5 18.2 20.1 -1.9 43.4 14.7
2007 13,861.4 18.5 19.7 -1.2 45.3 14.4
2008 14,334.4 17.6 20.8 -3.2 45.4 12.1
2009 13,960.7 15.1 25.2 -10.1 43.5 6.6
2010 14,348.4 15.1 24.1 -9.0 41.5 8.9
2011 14,929.4 15.4 24.1 -8.7 47.4 7.9
2012 15,547.4 15.8 22.8 -7.0 46.2 9.9
2013 estimate 16,202.7 16.7 22.7 -6.0 45.5 10.6

Government expenditures will go down when we experience full economic recovery (and not just a recovery for the top 1%)–that’s why welfare programs are known as “automatic stabilizers”. What will not automatically change are tax receipts, which are at their lowest levels since 1950. The American public has been paying a fairly constant portion of total federal taxes over the past 6 decades through income taxes–between 40-50%. Corporate taxes have fluctuated wildly; between 1940 and 1967 they made up 20-30% of federal tax revenue, since 1980 they have hovered around 10%.

The American public continues to pay its fair share, while corporations get a pass (and actually get huge bailouts and subsidies). America, in reality, has a regressive tax system. This low effective corporate tax rate stems largely from tax loopholes; a difficult problem to address rooted in corporate lobbying (money buys influence buys loopholes). Overcoming this problem will take an overhaul of the government tax code and a change in the current lobbying system, neither of which is an easy task.

Much less contentious should be targeting offshore cash holdings. While loopholes at least (allegedly) contribute to job creation, offshore tax evasion is a crime which robs the U.S. of vital tax revenues with no benefit to society. But even this “slam-dunk” reform is being challenged by the G.O.P.

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Privacy Narrative:

I thought it was interesting that the Center for Freedom and Prosperity, a conservative think-tank, used the privacy narrative to justify the G.O.P. stance on FACTA. This reminded me how Matt Taibbi, in his book “Griftopia”, explains how the wealthy sell financial sector deregulation to the lay-man.

According to Taibbi, financial regulation is equated to local / state level government regulation–the average person, who experiences government overreach in their day-to-day lives, feels for the “poor banker trying to earn a buck”. Of course this equation is false; however, many people do not know enough about our political system to understand this fallacy, especially when their favorite news outlets are driving this false narrative home.

It seems that something similar is being attempted with this privacy narrative. One of the main issues of the day is NSA “spying”. Perhaps conservatives are trying to latch onto this privacy narrative to drum up popular support for repealing FACTA. I think this is a tougher sell, although financial deregulation sounded like an impossible sell until pundits begin selling it. It is therefore important to expose this fallacy to the general public before the narrative hits the newsroom.

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Next time you hear an argument about “fiscal responsibility”, remember the G.O.P is the party of offshore tax evasion. Social spending programs and the tax code need to be overhauled; these issues will take time to remedy and must be addressed with care, they cannot be attached to short term issues like economic recovery or the debt ceiling.

Enabling offshore tax evasion by repealing FACTA benefits nobody except those who engage in offshore tax evasion–this should not be a contentious issue. Those who engage in such activities do not deserve our understanding or support, regardless of your stance on NSA surveillance.


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Economic Outlook: The Relationship Between Wages, Productivity, and Economic Inequality In America

Source: The Employment Policy Network (Huffington Post)

Note: Hourly compensation is of production/nonsupervisory workers in the private sector and productivity is for the total economy.

Source: Author’s analysis of unpublished total economy data from Bureau of Labor Statistics, Labor Productivity and Costs program and Bureau of Economic Analysis, National Income and Product Accounts public data series

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THE BOTTOM (high school graduates):

This graph highlights the growing disparity between wages paid and productivity for different educational levels (which we will use as proxies for societal classes). There are a number of explanations for this decoupling. One explanation is the decline of labor union participation due to regulatory changes and pressure from globalization. Another explanation is that as technology has advanced, it has become and increasingly important factor of production; businesses are opting to spend a larger portion of their revenues on machinery as opposed to workers.

This Monday I observed a roundtable at the U.N.– “The Threat of Growing Inequalities”–where one of the speakers raised this point. Taking home a “smaller piece of the pie”, those at the bottom are able to buy less political influence, which leads to weakened labor rights and neglected falling real minimum wages. Economic forces enable those at the top to rig to laws in their favor, further exacerbating inequality–this is the political economy explanation of rising inequality. This explanation hits on another divisive element of contemporary American society, the different legal system experienced based on ones wealth.

Whatever the reason (or as is often the case in real-world economic analysis, combination of reasons), this phenomenon obviously contributes to increasing inequality. How bad is inequality today? The Stanford Center for the Study of Poverty and Inequality has 20 graphs which tell much of the story, while Politifact has compiled a number of inequality related “fact-checks”.

It is heartening to see grassroots minimum-wage movements emerge, spanning many industries (and worldwide, many countries), led by people who are willing to take a stand through collective action. These people are willing to risk the wrath of vengeful corporate executives for economic justice. However, it will take a concerted effort by well intended politicians, independent media outlets (I try to do my part), and progressive judges / competent public defenders to capitalize on this grassroots activism if meaningful progress is to be made on the inequality front.

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THE TOP (“the .1%” is not represented in the graph above):

What is going on at the bottom of the economic pyramid is only part of the inequality story. The meteoric rise of top earners incomes increases inequality; economic growth is important, but how evenly it is distributed also matters. Again here we see a decoupling of wages and productivity in the other direction  (much greater compensation than productivity; in fact, one could argue short-sighted investments result in negative productivity for the economy as a whole, while at the sane time lead to huge rewards for those carrying them out). A micro-example of this adverse relationship, described by former derivatives trader Sam Polk, as “wealth addiction”, is highlighted in a recent NYT opinion piece:

IN my last year on Wall Street my bonus was $3.6 million — and I was angry because it wasn’t big enough. I was 30 years old, had no children to raise, no debts to pay, no philanthropic goal in mind. I wanted more money for exactly the same reason an alcoholic needs another drink: I was addicted.

I’d always looked enviously at the people who earned more than I did; now, for the first time, I was embarrassed for them, and for me. I made in a single year more than my mom made her whole life. I knew that wasn’t fair; that wasn’t right. Yes, I was sharp, good with numbers. I had marketable talents. But in the end I didn’t really do anything. I was a derivatives trader, and it occurred to me the world would hardly change at all if credit derivatives ceased to exist. Not so nurse practitioners. What had seemed normal now seemed deeply distorted.

DESPITE my realizations, it was incredibly difficult to leave. I was terrified of running out of money and of forgoing future bonuses. More than anything, I was afraid that five or 10 years down the road, I’d feel like an idiot for walking away from my one chance to be really important. What made it harder was that people thought I was crazy for thinking about leaving. In 2010, in a final paroxysm of my withering addiction, I demanded $8 million instead of $3.6 million. My bosses said they’d raise my bonus if I agreed to stay several more years. Instead, I walked away.

The first year was really hard. I went through what I can only describe as withdrawal — waking up at nights panicked about running out of money, scouring the headlines to see which of my old co-workers had gotten promoted. Over time it got easier — I started to realize that I had enough money, and if I needed to make more, I could. But my wealth addiction still hasn’t gone completely away. Sometimes I still buy lottery tickets.

Wealth addiction was described by the late sociologist and playwright Philip Slater in a 1980 book, but addiction researchers have paid the concept little attention. Like alcoholics driving drunk, wealth addiction imperils everyone. Wealth addicts are, more than anybody, specifically responsible for the ever widening rift that is tearing apart our once great country. Wealth addicts are responsible for the vast and toxic disparity between the rich and the poor and the annihilation of the middle class. Only a wealth addict would feel justified in receiving $14 million in compensation — including an $8.5 million bonus — as the McDonald’s C.E.O., Don Thompson, did in 2012, while his company then published a brochure for its work force on how to survive on their low wages. Only a wealth addict would earn hundreds of millions as a hedge-fund manager, and then lobby to maintain a tax loophole that gave him a lower tax rate than his secretary.

I see Wall Street’s mantra — “We’re smarter and work harder than everyone else, so we deserve all this money” — for what it is: the rationalization of addicts. From a distance I can see what I couldn’t see then — that Wall Street is a toxic culture that encourages the grandiosity of people who are desperately trying to feel powerful.

I was lucky. My experience with drugs and alcohol allowed me to recognize my pursuit of wealth as an addiction. The years of work I did with my counselor helped me heal the parts of myself that felt damaged and inadequate, so that I had enough of a core sense of self to walk away.

Dozens of different types of 12-step support groups — including Clutterers Anonymous and On-Line Gamers Anonymous — exist to help addicts of various types, yet there is no Wealth Addicts Anonymous. Why not? Because our culture supports and even lauds the addiction. Look at the magazine covers in any newsstand, plastered with the faces of celebrities and C.E.O.’s; the super-rich are our cultural gods. I hope we all confront our part in enabling wealth addicts to exert so much influence over our country.

This is a powerful piece, an inside voice admitting that derivatives traders “don’t really do anything”, and that an insatiable “wealth addiction” (and the political clout it buys) drives a widening income gap in this country. The idea that much investment “doesn’t really do anything”, that it is speculative rather than true investment, is not a new concept. In fact, the concept was laid out eloquently by John Maynard Keynes in “The General Theory of Employment, Interest, and Money“:

It happens, however, that the energies and skill of the professional investor and speculator are mainly occupied otherwise. For most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is really worth to a man who buys it “for keeps”, but with what the market will value it at, under the influence of mass psychology, three months or a year hence.

Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of “liquid” securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is “to beat the gun”, as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow.” 

This was written in 1936 in the context of post-Great Depression financial regulation, long before technological changes such as the internet and mass-deregulation created a risk-seeking “too-big-to-fail” financial sector which nearly destroyed the global economy in 2008. One can imagine what Keynes would have to say about the financial sector–and the inadequate regulatory response to the Great Recession–we experience today!

The top his risen due with the help of financial deregulation, enabling a “wealth addiction” by canonizing those selfish (or at best ignorant) enough to pursue such ends. This, coupled with the bottoming out of the lower end of the economic pyramid, leads to gross inequality. Inequality distorts our legal and political system, which leads to self-perpetuating social immobility; those at the top stay at the top (and continue rising), while those at the bottom stay at the bottom (an inter-generational poverty trap).

But how could we let this happen to America, once a “beacon of hope”? Wouldn’t our democratic system have stopped this from happening?

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THE MIDDLE (bachelors and graduate degree earners):

It is indeed perplexing how we got into this mess, given America’s democratic system. Part of the explanation is that we canonize the rich–we want to be them, we don’t want to regulate them. We also vilify the poor–they are lazy, undeserving, and are responsible for the majority of anti-social behavior (crime, drug use, etc.). “We” here is the middle class, the last faction of American society where social mobility and meritocracy exists (to a certain extent).

Middle class families can afford the necessities needed for “equality of opportunity”, even if they cannot afford great luxuries. They earn college degrees and go on to make living wages. These workers still see a connection between productivity and compensation. An income of $50,000/yr is probably related to the amount you produce. Perform well and there is a promotion in it for you; you may even “make it to the top”!

To paraphrase John Steinbeck: “Socialism never took root in America because the poor see themselves not as an exploited proletariat, but as temporarily embarrassed millionaires”

Those at the top receive more than they produce, so why complain (however they do get defensive anytime someone proposes a common sense regulation)? Those in the middle earn roughly what they produce, and have a reasonable belief they will make it to the top; you don’t want to regulate what you one day aspire to be! Those at the bottom–well fuck em’ they’re lazy drug users!

How have those at the top succeeded at winning the PR war on income inequality? The best explanation I have heard comes from Matt Taibbi’s book “Griftopia”. In this book, he tells a story of local level governance which is overrun by regulations (he uses an example of a bureaucracy ramming affordable housing down a communities throat). Knowing that middle-class people experience over-regulation at the local level, those at the top seize on this “big-government” narrative to drum up support for financial deregulation; they create a narrative of “the poor banker trying to earn a buck”.

This narrative resonates with the middle-class worker who experiences the aforementioned local government over-regulation. It is reinforced by media commentary, which is often a pawn of those at the top (another tool, like political clout, enabled by surplus wealth).  Furthermore, this narrative also vilifies financial regulation as a something which stifles economic growth / cost jobs / lead to higher consumer finance costs (and in this economy, we simply cant afford it!), even though economic theory and common sense suggest that inequality stifles consumption, job creation, and economic growth.

Of course this is a false equality; federal (and international) financial sector regulation and local / state government regulation are unrelated (local governance may well be over-regulated in some instances, but the financial sector is undeniably under-regulated). But unless you have studied the way the government works (which most people haven’t), you have no idea you are being fed horseshit; you hear the word “regulation” and cry bloody murder. Because local governance is often intervening on behalf of lower class citizens, this creates a rift between the middle and lower class, while the real culprits are laughing all the way to the bank (quite literally–they tend to work at banks).

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If this sounds like class warfare, that’s because America is experiencing class warfare.

This post relied heavily on generalizations, there are undoubtedly people in each class of society who do not fit into these generalizations. But in general these descriptions hold (that’s why they’re called generalizations).

This post focused on America; globally the inequality problem is much worse. According to a just-released Oxfam report, the richest 85 people in the world control the same amount of wealth as the bottom 3.5 billion (that’s nearly half the global population!). Recently, UNDP chief Helen Clark spoke about the link between inequality, poverty, and standard of living. Least developed countries experience different problems (extreme poverty, authoritarian / incompetent governance, lack of access to credit, armed conflict, etc.), but these problems manifest themselves in similar ways (poverty, inequality, power imbalances).

The whole world must confront and stop enabling “wealth addiction”, if we hope to realize sustainable human development in the 21st century. We must try, through regulation, taxation, and incentives, to restore the productivity-to-earnings relationship. As inequality becomes more of a “mainstream” issue (it has recently been emphasized by, among others, Barack Obama and Pope John Francis), we can expect to see a larger portion of society begin to champion pro-poor causes.


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The Age of Sustainable Development

I would like to invite all of my followers to sign up for “The Age of Sustainable Development”. This is a free online class taught by Dr. Jeffrey Sachs, a visionary in the field. You can commit as much or as little time as you want to the class (I, for instance, will watch the lectures but will not be doing any of the assignments).

This is an excellent opportunity to receive a free crash-course in sustainable development. For those who are interested, I have provided a link below.

https://www.coursera.org/course/susdev


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Conflict Watch: Geneva 2

After a brief snafu over Iran’s presence, the Geneva 2 peace talks are set to get underway tomorrow (1/22). While it is difficult to be excited about the possibility of meaningful change coming out of this conference, the fatalism surrounding the talks is downright counter-productive:

It has been 18 months since a previous international peace conference in Geneva ended in failure, and all other diplomatic initiatives have also proven fruitless.

“At best, Geneva 2 will reconfirm agreements made during the first Geneva conference, call for ceasefires, maybe prisoners swap and so on,” said one Western diplomat.

“At the same time, those taking part in the talks are de facto giving legitimization to Damascus. They are talking to Assad’s government on the other side of the table.

“And so the show would go on while Assad stays in power.”

But Shashank Joshi, a research fellow at the Royal United Services Institute in London, sets a lower bar for success. “We should think of this as a kind of ‘getting to know you,’ as a kind of sounding out the parameters of the possible here,” Joshi says, “what can be accomplished in terms of limited humanitarian access, for example.”

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Normative Narratives is a place to discuss what we think “should happen”–there is no room for cynicism or fatalism here. Having both sides at the table (the SNC and the Assad regime), Geneva 2 presents an opportunity to set the stage for meaningful change in Syria. Meaningful change, of course, requires concessions from both sides. In the context of a civil war, agreements needs to be externally verifiable and include repercussion for reneging on said agreements.  Here is how that change could play out:

1) Bashar Al-Assad commits to having open elections on schedule (May 2014, or if that date is not possible as soon as the U.N. deems such elections feasible), allowing for international peacekeepers and elections committees to oversee the vote. Any interested party could run in these elections; the precondition stated by S.o.S John Kerry, that only parties agreed upon by both the regime and the opposition may run, would restrict the field of candidates to non-existent. Let the Syrian people decide what they want, and ensure their voices are heard.

There are logistical and security problems with holding an election in a country mired in Civil War, in which a third of the population is either internally displaced or has fled the country. These are major issues to be worked out by the U.N. between now and when elections are to be held.

2) In return for a commitment to Presidential elections, the Syrian National Coalition (SNC) and Bashar Al-Assad agree to a nationwide cease-fire. There are potential problems with this solution; Will both sides honor the deal? Can the SNC retain any legitimacy with the opposition if it agrees to such a deal?

While these concerns are legitimate, they continue a fatal theme that has (in part) allowed the Syrian Civil War to persist. This theme is the marginalization of the vast majority of Syrians (who want a ceasefire and elections), while placing the greatest emphasis on the desires of the most violent parties of the war. By agreeing to a ceasefire, it will become clear which factions of the opposition are committed to a democratic Syrian state, and which factions only wish to seize power / setup an Islamic state.

Assad has reason to agree to a ceasefire as well, even if he is not at risk of losing the war. With a third of the population displaced, and an estimated loss of 35 years of development gains, Assad has a long way to go if he has any hope of becoming the legitimate democratically elected leader of Syria.

3) Assad has used the narrative of “fight terrorists” to justify his brutal crackdown on the opposition. A ceasefire would force Assad to put his money where his mouth is. It can be assumed that ISIS (Islamic State of Iraq and the Levant) would not honor the ceasefire. Let those factions continue to pose a security threat, and force Assad to fight them (instead of sitting back and laughing at rebel in-fighting). This would also put to rest the claim that Assad is actually backing ISIS to undermine his legitimate opposition:

U.S. Secretary of State John Kerry accused the Syrian president of trying to hijack the agenda. “Nobody is going to be fooled” by Assad’s attempts to portray himself as the protector of Syria against extremists, Kerry said, “when he, himself, has been funding those extremists.”

It is a charge that the rebels have been leveling for months, that the Assad regime covertly backs the al-Qaida-linked Islamic State of Iraq and Syria (ISIS) as a tactic to undermine any legitimate opposition.

“All of us know that the regime does not attack places held by ISIS,” says a Western diplomat. “There is an alliance of convenience between the two. It makes clear to the world where the defense against extremists lies.”

ISIS would also have to be countered from the Iraqi side in order to push this group to the margins.

4) A cease-fire would compromise the SNCs ability to take up arms again, by alienating the group from many of the opposition fighters on the ground. If Assad reneged on either the cease-fire or holding transparent elections, the SNC would be stuck between a rock and a hard place. It is therefore imperative that this deal is backed up by a commitment by the UNSC (including Russia and China) and NATO forces to intervene in the instance of meaningful deviations from this road-map to democracy.

Without such a commitment, the cost of reneging for Assad would be non-existent, while (as mentioned above) it would be disastrous for the SNC. Furthermore, a U.N. peacekeeping mission would need to be setup immediately to ensure Assad does not punish those opposed to him once they lay down their arms, while also establishing an environment conducive to transparent elections.

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Lots of commitments between parties who do not like or trust each are needed in order to make this plan a reality. However, in the context of a “hurting stalemate”, growing regional instability, and gross human rights violations, there is no stomachable alternative. The international community has put in a great effort to make Geneva 2 a reality. The SNC has continued to put its faith in the international system, despite years of empty promises and inaction. The Syrian people cannot afford a meaningless convention, with a best-case-scenario of increased humanitarian access.

The world owes it to Syria to aim big, and make a full-faith effort to establish a ceasefire, expand access to humanitarian aid, and create a road-map to transparent democratic elections. I believe I have mapped out a good starting point, one that requires concessions from both sides and is mutually beneficial. If I can think of these ideas, one can only hope that diplomatic officials could come up with a realistic / workable solution.


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Economic Outlook: Public-Private Partnerships, for Better or for Worse

The following blog combines two previous topics discussed here at NN–Public-Private Partnerships (PPPs) and State subsidies to private corporations. While both technically represent a “pubic-private partnerships” (both public and private money going towards the same goal), that is where the similarities end.

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Public-private partnerships, as they are intended, leverage public (tax-payer) money to raise private sector money for a cause. These partnerships often raise money for innovative purposes, in order to help cultivate new industries which indirectly lead to future jobs and tax-revenue. Universities, as centers of R & D and learning / training, also have a role to play in PPPs teaching people the skills needed to take part in this innovation. An example of a PPP that functions this way are President Obama’s recently announced manufacturing institutes.

With less than two weeks till his State of the Union address on Jan. 28, Mr. Obama hastened to make good on a pledge from last year’s speech, announcing the creation of a high-tech manufacturing institute aimed at creating well-paying jobs.

Speaking to 2,000 students at North Carolina State University, which is leading a group of universities and companies that established the institute, Mr. Obama said it was the kind of innovation that would reinvigorate the nation’s manufacturing economy.

This is the first of three such institutes the White House plans to announce in the coming weeks. It will be financed by a five-year, $70 million grant from the Department of Energy, which will be matched by funding from the consortium members, including the equipment maker John Deere and Delphi, an auto-parts maker.

The institute will use advanced semiconductor technology to develop a new generation of energy-efficient devices for automobiles, consumer electronics and industrial motors. Earlier Wednesday, Mr. Obama toured a Finnish company, Vacon, that makes drives used to control the speed of electric motors, to increase their energy efficiency.

Confessing that there was “a lot of physics” in the company’s presentation, the president seemed most interested in which of the components were made in the United States.

The announcement Wednesday of the new manufacturing institute showcased the White House’s determination to press ahead with jobs programs, with or without Congress. Mr. Obama said he was determined to make 2014 “a year of action.”

But it also laid bare the limits of Mr. Obama’s authority, since Congress has stymied his more ambitious proposals that require legislation. In last year’s State of the Union address, the president announced a $1 billion plan, modeled on one in Germany, to create a network of 15 institutes that would develop new industries.

But setting up 15 institutes would require congressional authorization. So last year, Mr. Obama narrowed his focus to establishing three institutes using existing funds and executive authority. At the same time, he increased his long-term goal to 45 institutes over 10 years, while acknowledging this would require congressional action.

To be clear, PPPs are not a call for charity–they represent mutually beneficial and sustainable economic arrangements. Businesses need future employees and customers, governments need non-dependent tax payers, a Universities future success is linked to it’s graduate employment rate, and people need jobs. If these projects prove successful, it will be difficult for congress to block the programs expansion.

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Subsidizing individual corporate initiatives, on the other hand, does not lead to many of the positive externalities associated with PPPs. Unlike traditional PPPs, it does not give the government any ownership of a project–a company is free to leave for greener pastures if it receives a better offer after the terms of an agreement end, leaving a municipality with nothing but a large bill. Furthermore, this practice represent one aspect of a “race-to-the bottom” that pits the private sector against workers and society as a whole:

Boeing is a company that pits state governments against one another to compete for larger subsidies and forces communities into a race to the bottom to see who can fight unions and lower wages the fastest. It is a prime example of 21st century business in the United States. As a result of these tactics, American workers, both unionized and independent, have little choice but to accept the lowered living standards their employers offer as conditions for their doing business.

This practice has become common. In the last year alone, 13 states granted corporate subsidy packages of over $100 million to companies like Toyota, Yokohama Rubber, Boeing and MetLife. Many of these subsidies are not for job creation but for job relocation — to lure business over to one state at the expense of its friends and neighbors.

The story of Boeing is an example of how ruthlessly U.S. businesses use the needs of some workers to justify lowering the standards of others, to the ultimate detriment of both.

Boeing’s strategy is a profitable one. It saves the company money, reduces wages and benefits for workers and ultimately absolves the company of any financial responsibility to take care of its retirees. As a result, production workers, regardless of their state, are left with a smaller slice of a bigger pie. This is, of course, the point: “Now that we have internal competition (among production sites), we’re going to get much better deals,” Boeing CEO Jim McNerney explained in May.  The deals aren’t only on the price of labor, but on the size of subsidies, which states and municipalities must fit into their budgets by either raising taxes or cutting services.

Unless American workers miraculously rediscover collective bargaining or begin to lay claims on the government to promise what organized labor once provided, then their lives will continue to be shaped by companies like Boeing. Their wages will be taken out of their pockets, their tax money out of their schools and roads…

These initiatives, unlike PPPs which are aimed at innovation and job creation, only benefit a single corporation. Furthermore, these projects often amount to job relocation, as opposed to job creation. There are many good reasons for subsidies to exist; for example, subsidies can help promote “infant industries” and to reward positive externalities. However, giving tax-payer money to already profitable companies in order to lure jobs from one municipality to another is not one of them. Private sector job creation is not charity, it is a cost of doing business that companies would face regardless of a subsidy.

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The problem is this country has empowered corporations at the expense of workers and societies as a whole. Don’t believe me? There is ample evidence of the different “recoveries” experienced by the “haves” and the “have nots” in America (spoiler: the wealthiest have done great post-recession, while masses have seen declining wages and standards of living). There are no easy fixes to this reality; only by championing workers rights, increasing minimum wages, and ending the municipal “race-to-the-bottom” (perhaps by creating a federal oversight board with the exclusive power to negotiate private-sector subsidies, based on needs-based C-B analyses) can we hope to take America back for the average working man / woman. PPPs can play a positive role in this transition, if they are used to spur new investment and industry. On the other hand, taking money out of public programs and giving it to private corporations will only exacerbate the divergence between the “haves” and the “have-nots”.

It is true that we face a depressed labor market; in such an environment, people are afraid to speak up in fear of losing whatever job they do have. On a larger scale, politicians are unwilling to take any stand that may be met with retaliation by corporate interests. This fear is being used against the American public by corporations to further push down their costs even as they realize record profits. If we can overcome this fear, and challenge the bellicose rhetoric of private sector interests, we can begin to realize a redistribution of wealth which would benefit not only individuals but our economy as a whole.

It is up to Americans to decide what role we want the private sector to play in our economy, and elect leaders who will fight for those goals. Will we support corporations that share in the costs of sustainable human development, or will we continue to reward corporations that value short-term profits above all else?


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Going on Vacation!

Hello NN Community,

I will be taking a well deserved break (Jan 4th-11th) from blogging, to enjoy vacation with my beautiful girlfriend.

I’m sure there will be lots of interesting developments over that time, so be sure to check back soon after the 11th for new blogs!

I have a feeling 2014 will be a good year for NN, human rights norms, social justice and sustainable human development.

Never downplay your ability to shape the world you want, and remember meaningful change always starts from humble beginnings.

All the best,

Benjamin Zupnick

 


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Economic Outlook: China’s Local Debt Solution–Financial Liberalization or Debt Monetization?

Original Article:

The total debt of local governments in China has soared to nearly $3 trillion as the country’s addiction to credit-fueled growth has deepened in recent years, according to the findings of a long-awaited report released on Monday by the central auditing agency.

The June figure also represented a sharp increase of 67 percent from the end of 2010, when an earlier report by the Audit Office estimated local government debt at 10.71 trillion renminbi.

In the five years since the onset of the global financial crisis, local governments at the provincial, municipal, county and township levels across China have gone on a spending spree, loading up on debt to finance a surge of investment in infrastructure, real estate and other projects.

The structure of much of this borrowing has also raised concerns. With a few exceptions for pilot programs, local governments in China are prohibited from directly taking on loans or issuing bonds. Instead, they have set up thousands of special-purpose financing vehicles that borrow on the government’s behalf to pay for a given project.

Such financing vehicles had confirmed probable and potential debt obligations totaling 6.96 trillion renminbi as of June, according to the Audit Office’s report, accounting for nearly 40 percent of all local government debt.

Analysts had for months been anticipating the results of the audit office’s survey. As part of an investigation that began in July, the agency said, it deployed 54,000 auditors across the country, who combed through the books of more than 62,000 government departments and institutions and examined 3.4 million debt instruments related to more than 700,000 projects.

Based on findings of the new report, Lu Ting, a China economist at Bank of America’s Merrill Lynch unit, estimated that China’s total public debt stood at 53 percent of gross domestic product. Adding corporate and household obligations lifts the total debt ratio to as much as 190 percent of G.D.P., he estimated.

China’s overall debt ratio “is neither exceptionally high nor low,” Mr. Lu wrote on Monday in a research note. Still, he said he was concerned that for the last two years China has been adding debt faster than its economy has been growing.

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Financial Liberalization:

According to analysis by Reuter’s economists, China’s plan to reign in debt via municipal bond markets relies on “the one thing its officials are most afraid of: transparency”:

By letting local governments sell bonds for cash, China wants to rely on nimble markets rather than inflexible regulations to keep spendthrift units in check.

The stakes are high. A bond market is the centerpiece in China’s blueprint to mop up fiscal troubles and keep its economy growing at an even pace, giving it needed room to start other bold financial reforms.

But analysts say China’s dreams of a municipal bond market are so far just that, as building one has been impeded by a lack of disclosure from local governments on how much money and assets they have, and how much they owe.

“If you want to lend to a specific government, you need to have a clue as to what the financial conditions are like,” said Tan Kim Eng, a senior director of sovereign ratings at Standard & Poor’s in Singapore.

“There’s still a lot of work to be done on the fiscal transparency front.”

“Any improvement to fiscal transparency will be limited unless the central government regularly publishes similar audit reports,” Standard & Poor’s said separately in a note on Tuesday. “It’s also unclear whether China will disclose the debts of individual local and regional governments.”

To be sure, China is mulling other options for cleaning up its debt mess, including allowing private investors to pay for public works, and letting the central government absorb more spending responsibilities.

But no plan resonates better with reform-minded officials than that for a municipal bond market, partly because it fits perfectly with China’s goal of reducing central planning to let financial markets work their magic.

Facing savvy local officials quick to change financing strategies to evade rules, Chinese experts have championed creation of a municipal bond market. Such vehicles, they say, will decide which governments deserve funding, and spendthrift ones will be punished with higher borrowing costs.

Beijing appears to like the idea, and is testing the ground for such a bond market in six prosperous cities including Shanghai and Guangdong.

But short of full disclosure of just how much governments take in and borrow, analysts doubt China’s experiments with its local bond market will go far.

“Banks and rating agencies do not have easy access to local governments’ overall fiscal position, which includes not only budgeted revenue and expenditure but also extra-budgetary revenue and expenditure,” the International Monetary Fund said in October.

“This lack of transparency prevents banks and rating agencies from pricing credit risk properly and prevents local governments from managing related risks prudently,” it said.

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Debt Monetization:

Another option to reign in local debt is “debt monetization”. In such a scenario, China’s central bank (The People’s Bank of China) would print money, and use that money to buy up outstanding debt (taking it out of the public’s hands). China’s central government could then cancel the debt it just purchased, on the condition certain policies it desires are enacted (financial transparency / fiscal responsibility / greater future role for the central government in local budgetary decisions for example).

The downside of “debt monetization” is that it increases the money supply, which can have inflationary consequences.

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Which policy (or mix of policies) will China pursue to reign in local government debt? It depends if you believe in China’s economic blueprint rhetoric or not.

In recent months, China has revealed an ambitious plan that will allow markets to play a bigger role in the economy, beginning a shift from a primarily export based economy to one based more on personal consumption. In line with this plan would be a financial transparency / market based approach to the local debt problem. Increasing budgetary transparency would make local governments more accountable to financial markets and (secondarily) their electorates.

However, the debt monetization approach creates winners as well (who happen to be the usual winner in China–the political elite). It would provide a greater role for the Communist Party in local economic decisions. It would also reduce the value of China’s currency (monetary expansion), which while reducing disposable income (consumption spending) would likely make exports more attractive (which has been the traditional engine of Chinese growth). If you think the Chinese government is just blowing smoke with its economic “blueprint”, and cares more about aggregate growth rates than personal well-being, the debt-monetization approach makes more sense.

It remains to be seen what actions the Chinese government takes, and actions speak louder than words. “Pilot” market liberalization projects have begun in large “international” cities like Shanghai and Hong Kong, will they reach smaller municipalities as well? Can China’s blueprint for economic liberalization fit in with the  determination of the Communist Party to keep a strong grip on political power? Is the Chinese government trying to say the right thing, while further entrenching the role of the central government in everyday life?

The policy response to the local debt crises will provide some rare insight into the true intentions of the Chinese Communist Party.