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Economic Outlook: Obama’s Shift Sights From “Grand Compromise” to Grand Vision

Original Article:

President Obama’s forthcoming budget plan will not include a proposal to trim cost-of-living increases in Social Security checks, the gesture of bipartisanship he made to Republicans last year in a failed strategy to reach a “grand compromise” on reducing projected federal debt.

White House officials said on Thursday that since Republicans in Congress have shown no willingness to meet the president’s offer on social programs by closing loopholes for corporations and wealthy Americans, the proposed budget for the 2015 fiscal year will not assume a path to an agreement that no longer appears to exist.

The budget plan, which will be out in early March, a month late, will abide by the overall spending guidelines agreed to by Republicans and Democrats late last year. But included in those spending limits will be a $56 billion proposal to increase spending on some of Mr. Obama’s key initiatives, officials said.

Mr. Earnest said that would include spending on manufacturing “hubs” that the president has promoted over the last year; additional government programs aimed at helping people develop new skills; and funding for early childhood education programs like preschool.

“This initiative that the president will propose will be fully paid for,” Mr. Earnest said. White House officials declined to describe the revenue increases, but said they would include closing corporate loopholes, a move the president has supported in the past.

Mr. Buck criticized the $56 billion proposal as another effort by the president to spend more taxpayer money than the government can afford.

“The one and only idea the president has to offer is even more job-destroying tax hikes, and that nonstarter won’t do anything to save the entitlement programs that are critical to so many Americans,” Mr. Buck said. “With three years left in office, it seems the president is already throwing in the towel.”

Administration officials said Thursday that the budget would include proposals to make good on the president’s campaign promise to eliminate provisions of the tax code that allow corporations to shift profits overseas to evade their obligations.

Democrats say such provisions are loopholes, and Mr. Obama’s calls to end them are a perennially popular line with voters of both parties and among independents. Democrats and Republicans agree there is virtually no chance again this year of a bipartisan overhaul of the corporate tax code, despite claims by both parties to be in favor of such change.

The proposed changes to the overseas tax provisions would raise additional revenues of several billion dollars a year.

President Obama’s proposal also includes some $300 billion in infrastructure spending, to be paid for by closing certain tax loopholes.

When those on the political right talk about “fiscal responsibility”, they focus solely on cutting social programs. They buy into the notion (or perhaps have been bought into the notion via lobbying / campaign finance) that closing any tax loopholes will cause unemployment to soar.  And people believe them, Why is that? Because regular people experience over-taxation and over-regulation in their daily lives. They do not realize that the very wealth people, and the corporations they control, do not play by the same rules.

Sensationalism is good for two things: 1) distracting people from the real issues and; 2) paralyzing your opponents into inaction. Remember when high levels of U.S. sovereign debt was supposed to cause soaring interest rates? When QE easing was supposed to cause runaway inflation? Every once in a while, you have to call someones bluff to keep them honest; the time is past due for politicians to collectively call the bluff of corporate interests.

One look at the historic tax revenue tables (p 34-35) tells the story; for decades households have paid a relatively steady portion of income tax revenues (between 40-50%) while corporate contributions have been wildly volatile (from upwards of 30% in the years following WWII, to single digit percentage contributions many years starting in the 80s). In 2009, households contributed 43.5% of U.S. income tax revenue; corporations contributed 6.6%.

The U.S. has one of the highest corporate tax rates in the world, at 35%. We also have one of the most complex and loophole ridden tax codes in the world. Corporations find themselves largely off the hook, while households continue to contribute their share towards making the government work. The results are obvious; even during times of economic growth, we see widening inequality accompanied by record corporate profits.

In fairly remarkable news, a proposal to be released tomorrow by Representative David Camp (R), Chairman of the Ways and Means Committee, appears to be the a genuine attempt at tax reform. Despite not yet being released, it has already run into criticism from both political parties:

Mr. McConnell, the Senate minority leader, said efforts to pass the proposal — which is expected to call for a cut in the top corporate income rate to 25 percent from 35 percent, and a reduction of the seven individual tax brackets to two — would prove insurmountable against Democratic demands that any tax overhaul include $1 trillion in new revenue.

“The majority leader and the president have said they want $1 trillion in new revenue for the federal government as a condition for doing comprehensive tax reform, which we know we ought to do,” Mr. McConnell said Tuesday. “So I have no hope for that happening this year.”

Senator Harry Reid of Nevada, the majority leader, agreed with Mr. McConnell’s assessment that a tax overhaul will be difficult to push through Congress this year, but he blamed Republicans for the impasse.

“The truth is, we should have tackled tax reform years ago,” Mr. Reid said Tuesday. “It will be extremely difficult — with the obstruction that we get here from the Republicans on virtually everything — to do something that should have been done years ago.”

But he praised Mr. Camp for “coming forward with a piece of legislation.”

“Slam Dunk” Tax Code Revisions:

The Biblical phrase, “from each according to their ability, to each according to their need” (Marx took it from the Bible) is a pretty solid baseline for tax policy. When looking to fiscal reform, it is irresponsible (not to mention un-Christian, not that I am a religious man but many in this country purport christian values) to deprive societies most vulnerable of the bare minimum to lead dignified lives. This is not charity; young people need a minimum investment in order for them to become productive citizens. Those who are not lucky enough to be born into wealth are no less deserving of such opportunities. It is essentially what economists call “consumption smoothing” ; In law enforcement, it is know as “I’m the guy you pay later“.

(I am not all opposed to some sort of work-for-welfare program for older welfare recipients, so long as it is not subsidizing an unlivable minimum wage. If anything, the welfare-work should be on the multitude of public works projects needed on American infrastructure; public money for public works, not private profit.)

Two specific tax loopholes violate this general theory: offshore banking and corporate welfare:

There is a general consensus for closing a major loophole is offshore tax evasion / minimization. While tackling such an issues is a difficult task, we even have the requisite international support needed for tackling this  global issue. The only people who are opposed to closing such a loophole it seems are (surprise, surprise) Republican lawmakers. The U.S. government has already taken steps towards holding past violators, such as Credit Suisse, accountable. This is one half of the problem, the other half is taking all possible steps to prevent future tax fraud through laws like FATCA.

Another area worth exploring is the winding down of corporate welfare programs.

Obama has spent too much time learning his lessons. He came into power with a Democratic super-majority and squandered the opportunity in the pursuit of a Golden Age of political compromise and pragmatism. This goal has, beyond any shadow of a doubt, failed miserably over the past 5 years.

It seems Obama has finally learned his lesson. With an eye on regaining a Democratic super-majority in the 2014 midterm elections, He has shifted from his plan for a “Grand Compromise”, to laying out a grand vision for the role of the American government. Until that point (and depending on the outcome of the elections, perhaps past that point) he will use executive actions to push whatever reforms he can.

By clearly laying out his vision, Obama intends to let Americans decide what role they think the Federal government should play.

Disclaimer: It should not have to be this way. America should not need one party to have a super-majority to enact common sense policy reforms. Indeed, in the long run it is counter-productive to not have meaningful deliberation on major issues.

I would also like to commend David Camp’s effort of putting a tax reform proposal on the table (assuming that after 3 years, it carefully considers which loopholes to cut and which to keep). Although it is clearly not progressive enough, it offers a starting point for the tax code reform initiative. Furthermore, its mere existence cuts through the general malaise that has come to define our political system. The next step will be a bipartisan proposal (Mr. Camp’s proposal did not have any input from Democrats)

This, ladies and gentlemen, is what governance should look like; I for one do not care which side of the political isle it comes from.

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Conflict Watch: The Determinative Role of Armed Forces In Regime Change (A Comparative Analysis)

Police leave their position around the Ukrainian p[arliament in Kiev on Friday after the country’s deputy army chief resigned in protest over government attempts to involve the army to put down the unrest rocking Ukraine. Genya Savilov/AFP/Getty Images

Disgraced ex-Ukranian President Yanukovych (is it too soon to call him ex-President?) signed an agreement with the opposition for early elections and a new government, pulling Ukraine back from the brink of catastrophe. Do not confuse Yanukovych’s decision for altruism; rather it was a last resort after it became clear the Ukrainian army would not intervene on his behalf.

Today, the Ukrainian Armed Forces reiterated its commitment to neutrality. U.S. Defense Secretary Chuck Hagel commended the move, and his support is well founded. A comparative analysis of recent protest movements shows the determinative role Armed Forces play in domestic political conflicts:

Egypt: In modern Egyptian history, the Army has been the strongest and least unaccountable force in domestic politics. It is therefore unsurprising those in control of the Army are determined to ensure their spot at the top of the pyramid (no pun intended) is preserved. The Egyptian military has a vested interest in a protracted civil conflict; by creating an adversary in the Muslim Brotherhood, it has secured an important role in Egyptian life and public support. Indeed, military supremacy was enshrined in a recently passed constitutional referendum.

The Egyptian military determined the outcome of Egyptian politics by removing democratically elected President Morsi by a coup (as opposed to allowing a political process of impeachment and new elections to decide who leads). The army has restricted media independence and cracked-down on all dissenters (including many who were instrumental in removing previous dictator Hosni Mubarak and the ineffectual President Morsi). Now General Sisi–the very man who organized the coup–is poised to take over as Egypt’s next “democratically elected” president.

Syria: In Syria’s dynastic authoritarian regime, the armed forces are controlled exclusively by President Assad; the military cannot be expected to support the will of the people. Assad ordered a military response to peaceful protests, resulting in a protracted civil war with no end in sight.

Thailand:  The Thai army is committed to remaining neutral in anti-government protests (which was not a given; Thailand has a long history of military intervention in politics), allowing the political process to play itself out (the army has positioned itself near protest sight for security purposes, but hasn’t taken a side).

Prime Minister Yingluck Shinawatra has proposed early elections; her opposition wants an appointed caretaker government to implement reforms before elections are held. In a recent development, Yingluck has been called in to answer for corruption charges related to a rice subsidy (a policy symbolic of her Pheu Parties popularity with Thailand’s poor), which could result in her impeachment.

Venezuela: Paratroopers we’re called in to “maintain the peace”, which is allegedly a cover for a brutal crackdown of the anti-Maduro opposition. The future remains uncertain in Venezuela; if reports of a bloody crackdown are true, a protracted civil conflict is likely.

When it comes to regime change, the means are just as important as the endsThe extent to which Armed Forces remain neutral / indiscriminately uphold security (in order to give the political process time to run it’s course) is a good indication of both how “ugly” protests will become, and the direction a country will move ex post facto.

In Egypt the military could have remained neutral, allowing the Egyptian people to impeach Morsi and setup elections. Instead, the military decided to intervene, securing it’s own interests. Morsi had to go, but the way he was removed has set the country on a path divergent from pluralistic democracy. In a similar vein, Sisi may indeed be the President Egyptians want. If so, why the need to crackdown on dissenters?

Thai Prime Minister Yingluck may indeed be a corrupt ruler unworthy of her office. If this is the case, allow the National Anti-Corruption Commission (NACC) to conduct an impartial investigation. If she is found guilty, there may be grounds for impeachment. If not, the vocal minority opposition will have to rethink it’s position.

Notably, the Thai Military is allowing the political process to determine the countries political future (as in Ukraine), increasing the likelihood that a peaceful, prosperous, and democratic Thailand can emerge from this current bout of unrest (Unlike Egypt, Syria, and likely Venezuela).

If a countries Armed Forces are committed to the goal of pluralistic democracy, the best thing they can do is remain neutral and allow domestic political conflicts to be resolved politically. Democratic governance is derived from “soft power“–inclusive politics, non-violent protest, self-determination. The need to resort to force against non-violent protests is proof in and of itself that human rights rhetoric is being used to human rights violations.

When the global champions of human rights (U.S., E.U., U.N. etc) urge deescalation and dialogue, these are not empty words (as Human Rights Chief Navi Pillay has urged in Venezuela). Over the past few decades, “soft power” has played an increasingly important role in both domestic and international affairs. Governments that embrace this shift will ultimately be the most successful.


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Happy World Day of Social Justice

Today marks the World Day of Social Justice! Make it a point do do something today (and everyday) to promote social justice!

Social justice starts with interactions between people. While systematic change is always a daunting task, do something in your power to promote social justice; stick up for someone who is routinely treated poorly, start (or continue recycling), pay a little more for sustainably sourced goods, donate to a charity of your choosing, etc.

It is within everyone’s power to promote social justice; don’t let cynical / self-interested people convince you otherwise. Don’t let the crushing weight of the worlds injustices paralyze you into inaction; don’t allow perfection to be the enemy of progress.  


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Economic Outlook: Of Minimum Wages and Employment

The CBO released its analysis of the employment and budgetary effects of minimum wage increase yesterday. Advocates from both sides of the isle will seize on the reports findings to “prove their point” about the (de)merits of increasing the minimum wage. I found Jared Bernstein’s Economix blog on the subject pretty even-handed:

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

Note:

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

In fact, the study points out that the range, or confidence interval, around their central estimate ranges from a “very slight decrease” to one million.  The authors guess that there’s a two-thirds chance that the true estimate is in that range.

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

There is one paragraph of the report Bernstein does not seize on, which I believe merits greater consideration:

An increase in the minimum wage also affects the
employment of low-wage workers in the short term
through changes in the economy-wide demand for goods
and services. A higher minimum wage shifts income from
higher-wage consumers and business owners to low-wage
workers. Because those low-wage workers tend to spend a
larger fraction of their earnings, some firms see increased
demand for their goods and services, boosting the
employment of low-wage workers and higher-wage
workers alike. That effect is larger when the economy is
weaker, and it is larger in regions of the country where
the economy is weaker. (p. 7)

The positive employment effect of increasing the minimum wage (redistributing money to lower income individuals who, by definition, spend a greater share of every dollar earned; i.e. people who have a higher “marginal propensity to consume”) is “larger when the economy is weaker“.

Can there be any question that the economy is currently very weak? Specifically, aggregate demand is most depressed for the poorest, who have seen decreases in real household income over the past decade(s) (as opposed to the wealthiest 1%, who have captured 95% of income gains since 2009).

It is, therefore, quite reasonable to assume that job losses will be closer to the “very slight decrease” end of the CBO range, if indeed they are negative at all (an assumption that is directly in line with “the current consensus of economists who have studied the issue closely”).

The other findings of the report are fairly straightforward: 16.5 million workers will benefit from a $10.10 minimum wage by 2016, 900,000 will be raised out of poverty, with negligible effects on the federal budget:

“CBO concludes that the net effect on the federal
budget of raising the minimum wage would probably be
a small decrease in budget deficits for several years but a
small increase in budget deficits thereafter.” (p. 14)

Given that any budget forecast after “several years from now” borders on divination, one can even conclude that raising the minimum wage would actually result in a net gain for the federal budget. Spending on automatic stabilizers will fall (automatically) as poorer families / individuals rise above certain income thresholds. On the other hand, lower tax revenues are estimated to come from wealthier individuals, whom tend to find ways to have an effective tax rates below what their income bracket would suggest. In other words, spending cuts will occur automatically, while drops in tax revenue are considering tax revenues that may never have been realized in the first place.

As Mr. Bernstein concluded, no policy change is without trade-offs. However, it seems pretty clear that, in the current context, the benefits of increasing the minimum wage far outweigh the losses. So when you hear conservative politicians beating the “1,000,000 jobs lost drum” and/or the “increasing the deficit drum” over the next few  months, question whether that estimate is reasonable or simply an attempt to turn public support against a common sense policy reform.


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Economic Outlook: An Ounce Of Crisis Prevention Is Worth A Pound Of Cure

So why do the international community and national governments under-fund crises prevention initiatives? (Especially given that there is no singular “cure” for various crises).

The rising scale of needs, a collective inability to resolve protracted crises, and the interplay of new factors such as climate change, are making it harder for Governments and aid workers to effectively respond to humanitarian challenges, the United Nations today reported, stressing that development aid must contribute to managing crisis risk.

The report, World Humanitarian Data and Trends 2013, authored by the UN Office for the Coordination of Humanitarian Affairs (OCHA), highlights major trends in the nature of humanitarian crises, the underlying causes and drivers, and the actors that participate in crises prevention, response and recovery.

“Climate change, population growth, rapid and unplanned urbanization, and food and water insecurity are leaving more and more people at risk of crisis,” write the report’s authors, listing some of the new factors facing the humanitarian community.

Among other trends, the report shows that today’s major humanitarian crises are protracted “with few signs of improvements over the long term.”

Of countries that had an inter-agency appeal in 2012, eight had an appeal in eight or more of the previous ten years, including in Sudan, Democratic Republic of the Congo (DRC) and Somalia.

When not protracted, the crises are often recurrent, occurring as a result of shocks – climate, conflict, price – to chronically vulnerable people.

On these factors, the report concludes that humanitarian assistance is still overwhelmingly focused on response and development aid often fails to target the most vulnerable.

“Less than five per cent of humanitarian funding and less than one per cent of development funding is spent on crisis preparedness and prevention,” according to figures provided.

Just as one human rights violation enables others, one humanitarian crisis often leads to future manifestations of the same or related crises. The intractable / recurrent nature of humanitarian crises highlights the need to focus on a preventative approach to building resilience to humanitarian crises. Programs which build resilience to humanitarian crises are essentially poverty reduction / sustainable human development programs (think I am oversimplifying? The United Nations Development Programme’s motto is “empowered lives, resilient nations”).

Least developed countries (LDCs) do not have access to private sector credit (at affordable rates), particularly in times of great need (like after a major crisis). Therefore, an essential component of crisis preparedness are counter-cyclical fiscal policies. Many LDCs rely on natural resource rents for financing government programs. Counter-cyclical natural resource funds, such as the Nigeria’s Sovereign Investment Authority (which draws on excess oil rents), can be powerful tools for crisis preparedness.

Responsible use of ODA / natural resource rents relies on “good governance“. Corrupt leaders can easily embezzle ODA / public savings, and send that money offshore where it can never be recoveredFinding the right balance between prevention / preparedness and crisis response is a difficult task even for the most well intended governments / organizations.

However, it is obvious that spending only 1 % of official development assistance (ODA) on preventative / preparedness measures is a short-sighted strategy (although using a broader definition of “preventative action”, as I have, may encompass a larger portion of ODA). Further exacerbating the problem, there is a large gap in ODA commitments from the worlds wealthiest nations. Dedicating a bigger slice of a bigger pie to crisis prevention / preparedness is needed to strike a responsible balance

There are obvious reasons why the vast majority of ODA goes towards crisis response. Failure to respond to a humanitarian crisis can create breeding grounds for disease, human rights violations, violence/terrorism, and/or lost generations of economic growth. In addition, it is generally easier to mobilize resources in response to a specific incidence (which is seen as unavoidable), than it is for under-development / extreme poverty (which people often unmistakably attribute to laziness). However, it should be the job of development organizations to direct funding to the avenues which will have the greatest impact.

The democratic governance based approach to sustainable human development helps overcome common development issues. By emphasizing political rights and accountable governance, donors and citizens can be confident money is going (or in the case of preparedness, staying) where it is “supposed” to go. Farsighted “good” governments, whose capacities are fully developed with adequate resources (a combination of public savings / ODA), can achieve the simultaneous goals of economic development and resilience to crisis. By emphasizing human rights and environmental sustainability, humanitarian crises are addressed preventatively.

There is no one “road-map” for Sustainable Human Development. Every country is unique and has to build its own path–what Dr. Jeffrey Sachs refers to as “differential diagnosis“.

However, there are some common steps all LDCs should take if they wish to be on the path to sustainable human development: 

1) Draft Poverty Reduction Strategy Plans (PRSPs) that take into consideration the indispensable role of human rights and accountable governance; 

2) Legislate the human rights accountability from all relevant stakeholders (governments, civil society, NGOs, private sector, IGOs, etc.);

3) Mobilize a greater share of resources for sustainable human development programs to prevent / prepare for humanitarian crises.

Update: The UNDP-EU just released interactive maps detailing their joint projects over the last 10 years. One of these maps focuses on crisis prevention and recovery projects.


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Economic Outlook: In Chattanooga VW Union Vote, It’s One Version of “Business As Usual” vs. Another

German automaker Volkswagen AG, in a brief but bluntly worded statement on Thursday, said a vote this week on union representation at its Chattanooga, Tennessee, plant would have no bearing on whether it will build a new crossover vehicle there.

The statement was contrary to U.S. Senator Bob Corker’s announcement on Wednesday that he had been “assured” that if workers at the factory reject United Auto Worker representation, the company would reward the plant with a new product to build.

Bob Corker:  “I’ve had conversations today and based on those am assured that should the workers vote against the UAW, Volkswagen will announce in the coming weeks that it will manufacture its new mid-size SUV here in Chattanooga,” Corker said on Wednesday

A spokeswoman for Corker did not respond when asked whether the senator also meant that a vote for the UAW would mean that the plant would not get the new product, which could create an estimated 1,500 new jobs.

National Labor Relations Board expert Kenneth G. Dau-Schmidt, who is professor of labor at the University of Indiana-Bloomington, said Corker was trying to intimidate workers into voting against the union.

“I’m really kind of shocked at Corker’s statement,” said Dau-Schmidt. “It’s so inconsistent with what VW has been saying and VW’s labor relations policy in general.”

Another labor expert, Harley Shaiken of the University of California-Berkeley, said, “The senator’s comments amount to economic intimidation that undermines the whole nature of union representation elections.”

Shaiken often advises UAW officials.

“If the senator’s statement doesn’t violate the letter of the law, it certainly violates the spirit of the law,” Shaiken said.

“There is no connection between our Chattanooga employees’ decision about whether to be represented by a union and the decision about where to build a new product for the U.S. market,” said Frank Fischer, chairman and chief executive officer of Volkswagen Chattanooga.

Earlier this week, Tennessee Republican lawmakers said if the UAW is voted into the Chattanooga plant, Volkswagen could lose millions of dollars in state incentives. In order to entice Volkswagen to build its new U.S. plant in Corker’s hometown of Chattanooga, the state gave it about $580 million in incentives.

“Tennessee’s battle over VW union vote has national implications”

If the workers at the VW plant do vote to unionize, they would adopt a German-style works council, the first of its kind in the U.S. Every VW factory worldwide, aside from the Chattanooga plant, has both union representation and a works council—making it an essential part of the VW culture.

Works councils, which are common in VW’s home country of Germany, are groups elected by the entire workforce that work with management on problem-solving and contribute to company-wide decision-making. Many German companies consider them to be a key component of high-quality manufacturing businesses. If Chattanooga workers vote not to unionize, they’ll be the only group of VW workers without direct say on matters such as the input on factory locations, work hours, vacation days and plant rules. 

Tennessee is a right-to-work state, which means that if Volkswagen workers do vote in the UAW, employees will still have the right to decide individually whether to join and financially support the elected union. Still, union membership has been sharply declining in most of the country–even Michigan–so a pro-union vote in Tennessee would signal a bit of a comeback for unions.

Last week, Chattanooga mayor Andy Burke told The New York Times, “Chattanooga has unique assets that allow us to grow economically. The same things that brought VW here — quality of life, a productive work force, wages that compare favorably to the rest of the country — those will still exist regardless of what happens with unionization.”

Frank Fischer, chairman and chief executive of Volkswagen Chattanooga released a statement last week asking that workers be allowed to make up their own minds. “Volkswagen Group of America and the U.A.W. have agreed to this common path for the election,” he said. “Volkswagen is committed to neutrality and calls upon all third parties to honor the principle of neutrality.” Perhaps the politicians should do the same thing, and trust these U.S. workers enough to make up their own mind.

This situation is largely similar to the Boeing case which recently resulted in Washington’s workers voting against their self-interests (privatization of pensions) in fear of losing their jobs. In both cases, we have a situation involving large public subsidies and union-busting, benefiting large corporate interests at the expense of average workers:

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.

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, and once they retire, they will be left with nothing but a 401(k), waiting for the next stock market crash.

There is one disturbing difference between the Boeing and VW example. In the case of the UAW, it is not even the company itself advocating against union membership. In fact, as discussed above, unions and workers-councils are part of VW corporate culture:

Unionization efforts typically face strong opposition from employers, but in this case VW has remained neutral, with criticism coming mainly from conservative politicians and anti-union third-party groups like National Right to Work, a Koch Brothers-funded group.

Large subsidies, aside from their explicit cost to taxpayers, implicitly give private corporations leverage over unions. Since subsidies are generally not tied to any long-term obligation from the company receiving them, that company can pit tax-payers against unions. This is exactly what happened in the Boeing situation:

In November, Boeing announced another new expansion project that concerned the construction of their newest planes, and the Washington State legislature granted the company the largest tax subsidy in the nation’s history to get them to stick around. Then, Boeing approached workers halfway through their contract extension and offered them a deal: Cut your retirement or we won’t make our newest plane in your town; refuse to back down and the taxpayers of Puget Sound can blame you for wasting their $8.7 billion.

In the rare case of a company that believes in workers rights and employee ownership of the production process (as VW does), subsidies give lawmakers leverage over workers. Vote down union membership, or we will withhold the subsidy. This would drive up the companies cost significantly more than just union membership itself, potentially forcing the company to relocate. Such actions serves the lawmakers ideological stance–they can say “look, unionization chased the jobs away”.

Either way, the subsidies are a corrupting and market distorting mechanism. Chattanooga Mayor Andy Burke has it right–let a municipality stand on its merits when attempting to woo a potential employer. It should be made illegal for municipalities to offer subsidies to employers; if a company wished to do business in America, it should be because of our skilled workforce and large consumption base, not because of some “race-to-the-bottom” or a short-sighted subsidy. A global carbon-tax would complement such a policy nicely; by making it more expensive to ship goods from abroad into America, America itself would become a more attractive manufacturing site.

Update: The Chattanooga VW workers voted down UAW membership last Friday, 712-626. While the future site of production for VW’s new crossover remains uncertain, VW does not seem pleased with political meddling in workers affairs, stating such actions may compromise future VW partnerships in America’s south:

“I can imagine fairly well that another VW factory in the United States, provided that one more should still be set up there, does not necessarily have to be assigned to the south again,” said Bernd Osterloh, head of VW’s works council. 

“The conservatives stirred up massive, anti-union sentiments,” Osterloh said. “It’s possible that the conclusion will be drawn that this interference amounted to unfair labor praxis.”

Well done Sen. Corker!


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Green News: US-EU Free Trade Agreement–Putting the Cart Before The Horse


Negative Externality

Original article:

Officials familiar with the EU’s proposal have told Reuters the European Union will offer to lift 96 percent of existing import tariffs, retaining protection for just a few sensitive products such as beef, poultry and pork.

“This is just the first step, but it sends a message that no sector will be completely shielded from liberalization,” said one person involved in preparing the EU offer. The official declined to be named because of the sensitive nature of the talks. Two other European officials confirmed the offer.

Tariffs between the United States and the European Union are already low, and both sides see greater economic benefits of a transatlantic accord coming from dropping barriers to business.

The United States and the European Union are seeking to seal a trade deal encompassing half the world’s economic output, hoping it can bring economic gains of around $100 billion dollars a year for both sides.

All moves to lower the cost of trade are seen as beneficial for companies, particularly automakers such as Ford, General Motors and Volkswagen, with U.S. and European plants.

EU cars imported into the United States are charged a 2 percent duty, while the EU sets a 10 percent duty on U.S. cars. Including even higher duties for trucks and commercial vans, the burden for automakers amounts to about $1 billion every year.

I have generally been supportive of the US-EU Free Trade Agreement. Two large developed economic blocs dedicated to human rights principles should be able to draft a reciprocal FTA without the adverse human rights implications of the Trans-Pacific Partnership Agreement (TPP) (whether they will remains to be seen).

However, another concern comes to mind. It is a concern that is inherent to all free trade agreements, but more-so the further the geographical distance between partners. I am talking about emissions released from the transportation of goods. In the absence of a global carbon pricing mechanism, environmental concerns are likely to take a backseat to immediate economic interests.

Trade agreements result in increased emissions from the shipment of goods. The purpose of any FTA is to increase the flow of goods by lowering the cost of doing business between partners. Emissions from trading represent a “negative externality“–a cost to society not reflected in the market price of a good. In the absence of a carbon-tax, when the only considerations for transatlantic trade are comparative advantage and transactions costs, any U.S.-E.U. FTA will naturally result in greater emissions than “socially optimal”. Remember, the main purpose of a carbon tax is not to raise revenue, but to reduce carbon emitting activities in favor of more environmentally friendly substitutes.

The E.U. and U.S. “are seeking to seal a trade deal encompassing half the world’s economic output, hoping it can bring economic gains of around $100 billion dollars a year for both sides”; this economic gain should be subject to a carbon tax. An agreement encompassing half of the worlds output, between ideologically aligned partners, is an excellent opportunity to begin implementing new human rights and environmental norms. Failure to do so mainly serves large corporations (although partly consumers as well in the form of higher prices, depending on the elasticity of demand for a good), at the expense of vulnerable groups and future generations.

With all the political rhetoric about overcoming inequality and the costs of environmental degradation, and in light of the damaging effects of human rights violations on economic development and national / global security, it would be a grave mistake for the governments involved to continue to put GDP growth above all else. This outdated priority undermines other foreign policy and domestic goals the U.S. dedicates vast resources towards. 


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Economic Outlook: “Supply-Side” Issues Keep 1/3 Of Children Under-Educated

Original article:

“This learning crisis has costs not only for the future ambitions of children, but also for the current finances of Governments,” says the independent Education for All (EFA) Global Monitoring Report Teaching and Learning: Achieving Quality for All,commissioned by the the UN Educational, Scientific and Cultural Organization (UNESCO).

“Around 250 million children are not learning basic skills, even though half of them have spent at least four years in school. The annual cost of this failure: around 129 billion,” it says, noting that in around a third of countries, less than 75 per cent of primary school teachers are trained according to national standards. Some 57 million children are not in school at all.

“These policy changes have a cost,” UNESCO Director-General Irina Bokova says in a forword. “This is why we need to see a dramatic shift in funding. Basic education is currently underfunded by $26 billion a year, while aid is continuing to decline. At this stage, Governments simply cannot afford to reduce investment in education – nor should donors step back from their funding promises. This calls for exploring new ways to fund urgent needs.”

The report notes that in 2011, around half of young children had access to pre-primary education, but in sub-Saharan Africa the share was only 18 per cent. The number of children out of school was 57 million, half of whom lived in conflict-affected countries. In sub-Saharan Africa, only 23 per cent of poor girls in rural areas were completing primary education by the end of the decade.

Supply and Demand Side Impediments to Education:

My professor for Community Economic Development  had an interesting way of framing development challenges. She urged the class to think about development challenges as primarily “supply-side” or “demand-side” issues.

As one would expect in a development economics course, education was a recurring topic; was the education-gap primarily a demand-side issue (are parents in the developing world not sold on the advantages of education, perhaps compared to the immediate need for income from child labor), or a supply-side issue (was it a lack of schools, roads, electricity, teachers, etc.)?

Of course, supple-side concerns can perpetuate  demand-side issues. For instance, if a parent does not believe their child will receive an adequate education, they may be more inclined to send their child to work instead of school. Therefore, in instances where there is an immediate need for child-labor income, it is all the more essential to ensure that a viable alternative (adequate education) exists.

According to this UNESCO report, the education-gap is primarily a supply side issue. This is encouraging news; given adequate government funding, development aid, and accountable / transparent governance, the education-gap is not an insurmountable problem. There is not some cultural difference holding back educational goals. Given the opportunity, parents will send their children to school (as proven by inputs from “The World We Want” Post-2015 National and Thematic Consultations).

However, even “good governments” that receive development aid face fiscal constraints–notably small tax revenue bases and high borrowing costs. Therefore, these governments must consider innovate means of “stretching a dollar” of education expenditure. One idea worth considering is combining prerecorded classes (taught by an excellent teacher), with an in-person “teaching assistant” to facilitate discussion, monitor homework assignments, and answer basic questions.

Similar to using nurses / physician assistants instead of doctors in certain instances to keep healthcare costs down, using a teaching assistant would put less pressure on finding the elusive “quality teacher” (which tend to be in short-supply even in developed countries). Prerecorded classes could be translated into dialects so that traditionally marginalized groups would have access as well.

This hybrid online / in-person model is not a panacea, but it does present a reasonable substitute for quality education given supply-side constraints. It is certainly an alternative education policymakers in developing countries (and poorer areas in developed countries) should explore.

The Role of Good Governance:

Governments should have an interest in delivering a quality education to all children. Under-education has both an immediate ($129 billion lost in global put) and future costs (the report said that ensuring an equal, quality education can increase a country’s gross domestic product per capita by 23 percent over 40 years.).

This normative stance requires a long-term and accountable outlook on governance. It is always easier (and personally beneficial) to embezzle development aid than invest in education. This is one reason why democratic governance plays such an important role in development. Governments must be made accountable to their constituents, otherwise socially beneficial policies will be foregone for personal benefits.

Furthermore, when development aid does not go to its intended recipients, it fuels anti-development-aid sentiments. People in the U.S. often argue “why do we send money abroad when we have social problems at home”? When this aid does not go where it is supposed to go (which to be fair, is fairly often), these people see their views as vindicated. Of course it is not an “either-or” situation; there is no reason why the richest nations in the world cannot reach their 0.7% of GDP aid commitment while also addressing domestic concerns. Development aid is a popular scapegoat, not only because the beneficiaries aren’t “us” but “them”, but also because people chronically overestimate the amount we spend on official development aid (ODA).

ODA should be conditional on “good-governance”, including independent oversight of aid-delivery. It is fair for those paying for the aid, and those receiving it. Any government that uses the “national sovereignty” excuse to deny independent oversight of aid-delivery should be found in violation of Article 2.1 of the International Covenant on Economic, Social and Cultural Rights, which states:

“Each State Party to the present Covenant undertakes to take steps, individually and through international assistance and co-operation, especially economic and technical, to the maximum of its available resources, with a view to achieving progressively the full realization of the rights recognized in the present Covenant by all appropriate means, including particularly the adoption of legislative measures.”

 


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Conflict Watch: Will Western Powers Stand With the Ukrainian Opposition, Or Stand By As Democracy Flounders?

Ukrainian President Yanukovych withdrew from EU trade talks in favor of Russian support, sparking protests

Secretary of State John Kerry today reaffirmed the importance of U.S. and E.U. support for the Ukrainian Opposition at the Munich Security Conference:

Secretary of State John Kerry said on Saturday that the United States and European Union support the people of Ukraine in their pursuit of stronger ties with the West…’They have decided that means their futures do not have to lie with one country alone, and certainly not coerced. The United States and EU stand with the people of Ukraine in that fight.’

However, Ukrainian opposition leaders urged U.S. and EU leaders on Friday to go beyond vocal support for their fight and demand a halt to violence they blame on Yanukovich.

“What we need is not just declarations but a very clear action plan – how to fix the problem and fix the violence, how to investigate all these killings and abductions and tortures,” protest leader Arseniy Yatsenyuk said.

The uncompromising standoff, which turned violent after Yanukovich passed a short-lived law barring protests in early January, prompted a rare intervention from the military on Friday.

NATO Secretary General Anders Fogh Rasmussen said Friday in a statement on Twitter that he was “very concerned by attempts to involve the military in the crisis” and added that the “military must remain neutral,” but said he was encouraged by the eventual repeal of the anti-protest law.

Russian Foreign Minister Sergei Lavrov on Saturday accused EU leaders of interfering in Ukraine’s internal affairs, helping stoke violent anti-government protests and displaying double standards.

“What does incitement of increasingly violent street protests have to do with promoting democracy?” Lavrov said in response to European Council President Herman Van Rompuy, who earlier said Ukraine’s future lay in Europe.

The EU and Russia have been at loggerheads over Ukraine since Yanukovich ditched an EU association accord in November under pressure from a Moscow seen to be trying to bring its former Soviet satellite back into its sphere of influence.

Speaking to Al Jazeera from Munich on Saturday, Leonid Kozhara, the Ukrainian foreign minister, called on Ukranians to distance themselves from the opposition, saying there was a “big misunderstanding between the government and the opposition.”

“For the first time in our country, we can see extremist groups,” he said.

Excuse us Minister Lavrov if I scoff at democracy lessons from the Russian Foreign minister…

The Ukrainian opposition is correct, they need more than words to support their movement towards more effective democratic governance. They need capacity building and organizational support from established democratic governments. Most importantly, they need economic support.

There are already disturbing trends emerging from these protests, namely military intervention and the introduction of an extremist narrative. The world has seen what happens when Western Powers “stand with” democratic movements (but really just stand by and offer little but supportive words). Over time, legitimate grievances and moderate oppositions are overrun by opportunistic extremist forces–the extremist narrative becomes self-fulfilling if a democratic movement is not nurtured. We have seen this sequence of events play out in Syria and Egypt in recent years; do not think because of Ukraine’s geography the opposition is less susceptible to anti-Western forces.

It is important to understand that those opposing democratic movements will not sit back and do nothing. While Russia may be less wealthy than the U.S. or the E.U., its political structure allows it more autonomy in foreign affairs. Despite pressing domestic needs, the Kremlin has proven willing to support to the Ukrainian government (in the form of a $15 billion loan, although this loan was recently suspended due to the inability of Yanukavych to squash his opponents).

Recognizing authoritarian regimes are not accountable when it comes to spending, Western powers must be more pragmatic and timely in their support. In conflict resolution, the thinking used to be solidify economic reforms, then focus on political reforms; history has proven this approach to be ineffectual.

Economic gains from democratization tend to be long term–innovation takes time. Demanding immediate economic reform in return for political support can undermine a budding democratic movement. If things get worse off right away (due to economic reforms), a new democratic regime may lose popular support (think the IMF demanding painful subsidy cuts as a condition for supporting the Morsi regime).

The only condition for economically supporting a democratic movement should be a commitment to pluralistic, inclusive democracy and human rights. Failing to support the Ukrainian opposition in this way means the champions of democracy are not learning from past failures. Furthermore, continued Western inaction could inadvertently undermine future democratic movements. Why would people who desire democratic freedoms risk reprisal if they have do not believe they will receive external support? While democratic freedoms are important, rational people will not oppose their government if they do not believe they have a legitimate chance of seeing their goals achieved.

Update: EU ready with “substantial financial aid” one Ukraine sets up its new government, following the ouster of Yanukovych.