Normative Narratives


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The Greek Bailout Deal Is A Failure of Leadership in Both Greece and Germany

Kick-The-Can2

The terms of the 3rd bailout deal between Greece and its creditors brought a lot of issues to the forefront.

Silly me for thinking negotiations had to with economics–modernizing the Greek economy by enacting needed structural reforms, while providing the Greek government with the fiscal space needed to promote growth and address it’s pressing humanitarian crisis (which said structural reforms would only exacerbate in the short run). Instead, the defining elements of the deal were related to personality and politics.

The Germans were mad at the Greeks, so much so that German finance minister Wolfgang Schäuble said perhaps Greece might be better off leaving the Euro–this short-sighted self interest is not suitable behavior for Europe’s de facto leader. Tsipras’s government, for it’s part, apparently did not have a backup plan in case it’s creditors failed to offer a reasonable deal. I know Syriza is new to politics, but you don’t have to be a master negotiator to know that going into negotiations without a backup plan is a flawed strategy.

I was a fan of Tsipras’s government because of the interim agreement it secured in February–the potential for trading structural reforms for fiscal space. But since that point it terribly misplayed its hand. It went into negotiations without a backup plan. It held a referendum at least a month too late–the overwhelming “no” vote would have been a strong bargaining chip had Greece been able to take it back to the negotiating table while still covered under the terms of its prior bailout.

But once those terms expired, and Greek banks closed, the only choices for Greece were Grexit or capitulation. Since there was no plan in place for a Grexit, Greece ended up with the terrible deal it got. That deal–as it currently stands–fails in all regards: financial sustainability, growth prospects, and short term humanitarian concerns.

Not Financially Viable:

The International Monetary Fund threatened to withdraw support for Greece’s bailout on Tuesday unless European leaders agree to substantial debt relief, an immediate challenge to the region’s plan to rescue the country.

A new rescue program for Greece “would have to meet our criteria,” a senior I.M.F. official told reporters on Tuesday, speaking on the condition of anonymity. “One of those criteria is debt sustainability.”

The I.M.F. is now firmly siding with Greece on the issue. In a reportreleased publicly on Tuesday, the fund proposed that creditors let Athens write off part of its huge eurozone debt or at least make no payments for 30 years.

The I.M.F. said in its report that a write-down could be avoided, but only if creditors extended the schedule for Greece to repay its debt. The only other alternative to a haircut would be for the eurozone countries to give Greece the money it needs to repay them.

“The choice between the various options is for Greece and its European partners to decide,” the I.M.F. report said.

Greece would need to spend a sum equal to more than 15 percent of G.D.P. annually to pay interest and principal on its debt, according to the latest I.M.F. report.

Does Not Fulfill Greek’s Human Rights:

The implementation of new austerity measures in Greece amid the country’s deteriorating economic crisis must not come at a cost to human rights, a United Nations expert warned today as he urged international institutions and the Greek Government to make “fully informed decisions” before adopting additional reforms.

“I am seriously concerned about voices saying that Greece is in a humanitarian crisis with shortages in medicines and food,” Juan Pablo Bohoslavsky, the UN Independent Expert on foreign debt and human rights, stressed in a press statement today. “Priority should be to ensure that everybody in Greece has access to core minimum levels of economic, social and cultural rights, including the right to health care, food and social security.”

“A debt service burden that may be sustainable from a narrow financial perspective may not be viable at all if one considers the comprehensive concept of sustainable development, which includes the protection of the environment, human rights and social development,” he added.

And of course, as the IMF report highlights, the deal is not even “sustainable from a narrow financial perspective”.

Kicking the Can or Letting Heads Cool?

If Greece’s creditors, led by Germany, ultimately want to see Greece stay in the Eurozone (for the long run), a friendlier deal is needed. If a “Grexit”, with its short term pain but long term possibilities to return Greece to economic health, is indeed in Greece’s best option given what it’s creditors are willing to offer, why not take that tough medicine and let the healing start? The current deal represents the worst of both worlds–economic pain now and a likely Grexit in the future.

The one positive of this deal is that it did buy time, which should not be undervalued as “Grexit” would be permanent and have terrible geopolitical consequences. But  without stimulus (there are talks of a 35 billion euro stimulus fund by 2020 if reforms are fully implemented, but this may be too little too late) and debt restructuring (which cannot be ruled out, but also cannot be counted on), the deal is little more than kicking the can down the road–all while the Greek people continue to suffer.

Greece’s creditors cannot keep dangling future carrots while imposing fiscal restraints which hurt Greece’s already beleaguered citizenry in the here and now. Aid must be synced with structural reforms, or else the Greeks will see their situation go from terrible to worse and reject the terms of this 3rd bailout. 

Doing the same thing and expecting different results is the definition of insanity. Greece has tried to implement reforms in order to unlock future aid before, and we see where that got it--a severely contracted economy, depression level unemployment rates, and costly political instability. 

This is not the time for more business as usual; this is the time for bold action and trust between Greece and it’s creditors. Unfortunately nothing about the past few months of negotiations suggest this is outcome will be realized.

 

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Greece, Birthplace of Democracy, Needs A Democratic Lifeline

No More Blood From A Greek Stone:

It appears Greece’s government has come up with a list of reforms it and its creditors can agree upon in return for 4 months of bridge financing to restructure the conditions of a longer-term growth strategy.

By trading structural reforms for fiscal space, each major player (Greece and Germany) is making major concessions in the name of pragmatism. Germany is relaxing its dogmatic belief  in fiscal targets to provide the Greek government with the fiscal space needed to restructure its economy without exacerbating its “humanitarian crisis”. Greece, in return, must officially bring to an end the era of lax tax collection and over-rigidity in the labor market.

Both sides are making major concessions, neither side is 100% happy, and its appears as if middle ground has been found–all signs of a meaningful compromise. One can only hope that when Greece’s list of reforms comes in on Monday, both sides of this debate remain on the same page:

Greece’s list of reforms to be submitted to the euro zone on Monday comprises pledges on structural issues such as tax evasion and corruption over the next four months without specific targets, a government official said on Saturday.

The accord requires Greece to submit by Monday a letter to the Eurogroup listing all the policy measures it plans to take during the remainder of the bailout period.

If the European Commission, the European Central Bank and the International Monetary Fund are satisfied, the Eurogroup is likely to endorse the list in a teleconference without the need for a formal meeting. Then euro zone member states will need to ratify the extension, where necessary through their parliaments.

There will not be specific figures or targets to be achieved tied to the goals, the official said, adding that the two sides had not yet discussed how Greece would be evaluated on the reforms.

EU officials and euro zone ministers said they had no reason to think Greece would not come up with a satisfactory list of measures on Monday night. However, some hawkish countries have insisted that if there are doubts, the Eurogroup would have to reconvene in Brussels.

Structural reforms are inherently difficult to implement. In order to make the difficult task of taking on strong interest groups politically possible, an overwhelming popular mandate is needed. The need for strong public backing becomes even more important during times of high unemployment, when those lucky enough to remain employed are (quite rationally) more afraid of losing their jobs.

According to a recent opinion poll, 68% of Greeks want a “fair compromise” with the EU; even after years of economic suffering, the vast majority of Greeks remain steadfast in their believe in the E.U.. Such support must be seized upon, it will not last forever.

What Greece needs now is a pro-growth, structural reform based bailout plan, not a continuation of its failed blood-from-a-stone internal-devaluation based “recovery”. Reducing it’s primary surplus while collecting greater tax receipts would open up the fiscal space Greece needs to both deal with its humanitarian crisis and create a safety-net for those adversely affected by labor market reforms as the economy readjusts. 

The past 6 years have had a deep psycho-economic effect on the Greek people. With overall unemployment at 26% and youth unemployment at 50%, to go along with a 24% contraction in GDP, the Greek economy has been ravaged. Lack of control over monetary policy (as all members of the Eurozone face) has limited Greece’s policy space, it must be allowed to regain some control over fiscal policy.

Greeks have suffered enough and have learned their lessons–these next four months are an opportunity to prove it. In addition to any external monitoring imposed as part of this deal, the Greek people must prove they can be their own corruption watchdog and can pay their taxes.

Fighting wealthy tax evaders may be a popular political platform and merited on social justice grounds, but in order to pay-down Greek debt without compromising human development, a widespread cultural acceptance towards paying taxes is required. There is no doubt Greece has been too lax in collecting taxes in the past, but this does not need to be an irrevocable problem. Through legislative reform and social accountability, Greece can overcome it’s culture of tax evasion.

Locking in long-term labor market reforms, without driving more people into poverty and exacerbating the “lost generation” of young Greeks, should be the mutual goal between Greece and it’s creditors. In fact, this could be a potential blueprint for other economically depressed European countries to renegotiate their social contracts with the EU. Democratic governance derives its legitimacy from the will of the governed; if peoples basic needs are not met, democratic governance cannot be sustained.

Greece is not in the clear yet. But by finding this acceptable middle ground, the foundations of a sustainable solution for keeping the Eurozone intact may have been laid.

Reversing the Democratic Recession:

Neither side of this debate should have to pretend that keeping the Eurozone unified is an unimportant political, economic, foreign relations and security consideration. Greece staying in the E.U. is important for Greece, Germany, the E.U. and any country with aspirations of democratic governance:

[Stamford University democracy expert] Diamond adds, “perhaps the most worrisome dimension of the democratic recession has been the decline of democratic efficacy, energy, and self-confidence” in America and the West at large. After years of hyperpolarization, deadlock and corruption through campaign financing, the world’s leading democracy is increasingly dysfunctional, with government shutdowns and the inability to pass something as basic as a budget. “The world takes note of all this,” says Diamond. “Authoritarian state media gleefully publicize these travails of American democracy in order to discredit democracy in general and immunize authoritarian rule against U.S. pressure.”

If anything, the U.S. has been the poster-child for prosperity through democracy compared to the E.U.. Regardless, twin “democratic recessions” of varying degrees on both sides of the Atlantic have compromised the appeal of democratic governance abroad. Spreading Islamophobia, antisemitism, and xenophobia throughout Europe–side effects of Europe’s failed economic policies–compromise the appeal of Western values and galvanize authoritarian and extremist messages. 

ISIS finds itself at Italy’s back-door geographically in Libya. But ideologically, ISIS could not be further away from European ideals. Ultimately, reversing the democratic recession and countering authoritarian and extremist ideals requires. among other things, proving democracy remains a viable path to widespread freedom and prosperity.

“Western” countries cannot push Greece towards China / Russia for a bailout. We, like Greece, finds ourselves at an inflection point–we must  prove that democracy in a first world country can satisfy peoples basic needs. Failure to do so could lead to a long-term setback in promoting modernization, human rights, and democratic governance in the worlds least developed countries.


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

Original article:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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Conflict Watch: The End Of Team America World Police (Part 5)

Well, after no installments of “The End of Team America” for a few months, I now have back-to-back blogs on the “subject”. I don’t make the news people, I just analyze it! I suppose with the specter of a potential U.S. strike on Syria, unrest in Egypt, and complications with Iran, the timing wasn’t ripe to discuss winding down America’s military involvement around the world. However, this has always been a long term goal of the Obama administration; with Assad’s regime complying with international chemical weapons experts / “Geneva 2” peace talks in the works (I am personally skeptical the Syrian opposition will participate, which would derail these talks), Egyptian unrest seemingly subsiding (or festering under the surface?), and Iran entering the fold of international diplomacy with renewed optimism (but is it just a stalling tactic or a real attempt at change?), it seems that the tune of news outlets has shifted away from imminent U.S. military intervention back towards the long-term goal of winding down America’s role in global security measures. True none of these shifts represent concrete changes in their respective debates, but they do present an opening for a different focus by news outlets, at least for the time-being. 

Original Article:

Germany called for closer military integration between groups of NATO countries on Tuesday as the alliance grappled with how to keep its defenses strong at a time of falling military spending.

Germany’s proposal, discussed by NATO defense ministers at a Brussels meeting, is that big NATO nations act as “framework nations” leading a cluster of smaller NATO allies.

These clusters of countries would jointly provide some military capabilities or develop new ones for the benefit of the whole alliance, with the lead nation coordinating their efforts.

The idea was welcomed by NATO Secretary-General Anders Fogh Rasmussen and by Britain but diplomats said some other countries, including France, had concerns about the proposal, fearing it could undermine countries’ sovereignty and lead to over-specialization.

“Does that lead to a kind of specialization which could be dangerous if some nations specialize only in certain types of mission and disengage from other missions?,” one diplomat said.

Some diplomats also worry that a cluster system could make it more difficult for NATO to use forces on operations because a parliament in one country could effectively veto military action by other nations in the cluster.

The United States has repeatedly voiced alarm about the growing gulf between U.S. military spending and capabilities and those of its European allies.

The German proposal would help share the cost of expensive military systems at a time when many NATO allies are slashing defense spending in response to the economic crisis.

Only four of the 28 NATO members – the United States, Britain, Greece and Estonia – met the alliance’s target of spending 2 percent of their economic output on defense in 2012.

As a block, the EU spends only 1.7% of it’s GDP on military expenditure. The U.S., by contrast, spends 4.7% of it’s GDP on military purposes. This unequal distribution of global security expenditure (39% of global military spending is by the U.S.) has placed an unfair burden on the American tax-payer, even as it has strengthened U.S. influence over global security decisions. The U.S. is expected to foot the bill of many multilateral security operations, which as led to roughly 1/4 of all Federal expenditures to go towards military purposes. This has constrained U.S. fiscal space, draining it’s economy of resources needed to reinvest in it’s future through social programs. The aggregate result has already begun to show in the form of increasing inequality and reduced social mobility.

It is not only in other countries best interest to reclaim some say in security matters, it is also in the U.S. best interest to have such a re-balancing take place. But absent other countries stepping up, the U.S. has no choice but to continue footing the bill, otherwise the “global security commons” would suffer. It appears that Germany now agrees with the U.S. and is taking the initial steps to more evenly distribute the burden of global security.

This plan certainly has snags, which are addressed in the article. Could more “specialized” NATO tie the hands of some of it’s smaller members, requiring an impossible consensus for military action? It is possible, although I would argue that states rarely make security decisions unilaterally (with the exception of the U.S., which would likely still retain it’s ability to act unilaterally in any foreseeable agreement). With each country having to take military intervention back to it’s legislature for a vote, having more votes ultimately complicates military action. I am sure that NATO members, headed by Germany and the U.S., will take necessary steps to streamline a more cooperative process, although admittedly I do not know what these steps would be at this time.

Germany was demilitarized after WWII, that was almost 70 years ago. Germany has, since that time, proven it has the political will, stability, and foresight to be a world power. It is time to allow Germany to become a true world power, by increasing its role in global security debates. I will be sure to keep my readers up to date on any news on this important proposition.


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Economic Outlook: Quantitative Easing, Monetary Policy Coordination, and the IMF

I was going to write a  conflict watch about the chemical gas attack in Syria, but as different actors are aligning with their interest and using mostly circumstantial evidence (Russia / Assad Regime: rebels did it, why would we launch chem weapons while U.N inspectors here?; Opposition / Western governments: Assad did it, emboldened by lack of international intervention after previous chem attacks, Assad subsequently shelled area so time would pass, now UN inspectors cannot get reliable results), I will refrain from speculating on these troubling events until more information emerges.

Continuing the narrative that has come to the forefront since G-20 finance talks in Moscow and the focus surrounding extra-territorial consequences of loose monetary policy at the Fed’s annual Jackson Hole meeting, policy coordination between central banks and new policy responses by IMF are needed to ensure as smooth as possible a transition from Q.E. to Fed monetary policy tightening (exactly when this will occur is uncertain, I am of the mind that it will be later rather than sooner).

Original articles:

Reuters:

Central banks should coordinate to avoid unwanted side effects as they exit from ultra-easy monetary policies that have left the world awash in cheap money, top policymakers were told on Saturday.

“The main challenge will be to manage the consequences of monetary policies, and their evolutions, on cross-border liquidity movements,” Jean-Pierre Landau concluded in a paper he presented to an audience that included top central bankers from advanced as well as emerging market economies.

The Fed’s bond buying, or so-called quantitative easing, has been at the heart of its aggressive efforts to revive U.S. economic growth after it cut interest rates to nearly zero in 2008. Interest rates in Europe and Japan are also ultra-low.

However, the purchases have spurred massive capital inflows into faster growing emerging economies, which are now suffering as investors anticipate an end to the easy money.

But he lamented that the necessary coordination on monetary policy was unlikely, and warned of the potential for the “fragmentation” of global capital markets.

Stocks and currencies plunged in India, IndonesiaBrazil and Turkey this week as investors fretted over a looming reduction in the U.S. Federal Reserve’s monthly bond purchases.

Landau acknowledged that central bankers dislike the idea of coordinating monetary policy because their job is to focus on domestic goals. But they worked well together during the 2007-2009 financial crisis, when the Fed, European Central Bank, Bank of Japan and other central banks coordinated rate cuts and currency swap lines.

As cross-border liquidity pressures build, they will find it productive to do so again, although cooperation is more likely through regulatory and financial structures aimed at preventing excessive leverage or harmful asset bubbles, he said.

In an ideal world, the cooperation would extend to monetary policy because policies in major economies such as the United States can have an international impact that amplifies their magnitude with domestic implications, Landau argued.

“The system itself is producing more accommodative monetary conditions than warranted by the situation,” he said. “In a reverse environment, when monetary policies need tightening, the effects could be symmetrical and complicate the exit from non-conventional measures.”

In addition, much could be gained through an international “lender of last resort,” which would remove the motive for some nations to maintain massive foreign exchange reserves, he added.

“All countries have a common interest in finding ways to disconnect reserve accumulation from exchange-rate management,” Landau said. “The need for national reserves could be reduced if credible mechanisms exist to provide for the supply of official liquidity on a multilateral basis.”

Economix:

The stimulus campaigns of the Federal Reserve and the central banks of Europe and Japan, by depressing domestic interest rates, have helped to push trillions of dollars into developing markets in recent years.

The question of what central banks are supposed to do about it dominated the formal agenda here at the Kansas City Fed’s annual monetary policy conference.

The answers were surprisingly mellow. The rest of the world would like the Fed to explain its plans clearly, and then to travel slowly. Bankers from developing nations said they might need to impose some restrictions on the outflow of capital, but expressed little concern over the potential for serious economic disruptions.

Christine Lagarde, the managing director of the International Monetary Fund, struck the same sanguine tone in a Friday speech, declaring that “Central banks handled entry well, and we see no reason why they should not handle exit equally well.”

She added that the fund – and by extension, the major economies – accepted that some developing countries might need to impose some financial controls. “In some circumstances, capital flow management measures have been useful,” she said.

This is not the way that policymakers used to talk. The big countries and the I.M.F. spent the last few decades pushing for the liberalization of financial markets. They argued that developing nations were creating their own problems by failing to take the painful steps necessary to moderate capital inflows, notably by allowing their currencies to appreciate. And they showed no tolerance for capital controls.

The argument for global monetary policy coordination– mainly that in today’s globalized world, where unfathomable amounts of money can and do flow at the click of a mouse, that a large countries monetary policy choices have a direct impact on other countries–has already been explored in depth.One of the most important developments in monetary policy over the last generation is the conclusion that central banks can increase the power of their actions by talking about their goals, thereby shaping the expectations of investors.” Managing expectations and policy coordination are logically related and present a synergy point for global monetary policy coherence. 

Central banks historically have served a dual mandate, to manage unemployment and inflation. A 3rd (secondary) mandate has emerged since the Great Recession; to manage the extra-territorial effects of monetary policy decisions.

Two other interesting points are raised in these articles; the issue of capital controls and flexible credit lines.

Capital Controls:

International  capital investments are necessary for helping least developed countries (LDCs) escape poverty traps / expedite their development process. However, the mobility and liquidity of capital in today’s digital and globalized age make capital flows intrinsically volatile–capital controls help temper this volatility. IMF managing director Christie Lagarde has endorsed the use of capital controls in certain instances, which represents a complete 180 from the IMFs “Washington Consensus” policies of the 1980s and 90s. When money is “cheap” (as it is now), it flows to places that offer a higher rate of return (i.e. developing countries). Capital controls provide a buffer from capital flight when monetary policy tightens (which is inevitably as the global economy recovers), which can otherwise have devastating standard of living / human rights implications.

Capital flight may lead to less investment / higher “risk premium” (investors will not like the idea of not having complete control over their investment), but it is surely should be a countries own decision what investments it allows in its country and under what conditions, considering the destabilizing nature of unchecked financial inflows. If speculative money does not wish to come into a country, that may be in that countries best long term interests anyways. The failure of “Washington Consensus” policies, culminating in global financial contagion during the Great Recession, has led the international financial community (headed by the IMF) to reverse it’s previous stance on capital controls.

Flexible Credit Lines:

Jean Pierre-Landau alluded to flexible credit lines with this comment;

In addition, much could be gained through an international “lender of last resort,” which would remove the motive for some nations to maintain massive foreign exchange reserves, he added.

“All countries have a common interest in finding ways to disconnect reserve accumulation from exchange-rate management,” Landau said. “The need for national reserves could be reduced if credible mechanisms exist to provide for the supply of official liquidity on a multilateral basis.”

Flexible Credit Lines are available to countries through the IMF if they meet certain preconditions (a shift by the IMF from imposing constitutionality on loans to having countries reach certain thresholds for eligibility, but after that providing assistance without conditions that can sometimes undermine development (see “Washington Consensus”). Countries gain access to funding by the IMF at an agreed upon rate (which is fairly low). By having this IMF insurance policies, countries are able to pursue policies in their best long-term interests (for example capital controls, or fiscal investments in public goods), as opposed to the short-term interests of speculative investors.

The existence of a FCL eases concerns of financial actors. The overall experience with FCL countries (to date Mexico, Columbia, and Poland, evidence suggests that Ireland will be next) has been overwhelmingly positive. These countries have been able to borrow at a lower risk premium without ever having to access FCL money–no FCL country has ever had to draw on FCL funds. The efficacy of FCLs is only amplified against the backdrop of the European Debt Crisis.

I am a strong advocate of both FCLs and capital controls for developing countries. Both policies are fully consistent with a human rights based approach to sustainable human development. Both policies can temper the destabilizing effects of capital inflows, giving governments the capital, policy, and fiscal space needed to respond to crisis situations. It is encouraging to see high level policy makers are of the same mind when it comes to monetary policy coordination, FCLs, and capital controls.

I invite my readers to view a PPT presentation (FCL Final) I did last year on FCLs. The study shows graphically the experiences of Mexico, Columbia and Poland before, during, and after the Great Recession (these three countries all performed very well compared to comparable countries). It concludes by arguing for “scaling-up” of FCLs by offering them to more countries as a potential development tool.

 


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Green News: Army Program to Test Waste-to-Fuel Viability

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Continuing the narrative on the potential of turning waste-to-energy, an Army program will offer a natural experiment of the economic viability of the concept (original article).

THERE is an indisputable elegance to the idea of transforming garbage into fuel, of turning icky, smelly detritus into something valuable.

But big drawbacks have prevented the wholesale adoption of trash-to-gas technology in the United States: incineration is polluting, and the capital costs of new plants are enormous. Gasification systems can expend a tremendous amount of energy to produce a tiny amount of electricity. Up to this point, it hasn’t seemed worth the trouble.

Mike Hart thinks that he has solved those problems. In a former Air Force hangar outside Sacramento, his company, Sierra Energy, has spent the last several years testing a waste-to-energy system called the FastOx Pathfinder. The centerpiece, a waste gasifier that’s about the size of a shower stall, is essentially a modified blast furnace. A chemical reaction inside the gasifier heats any kind of trash — whether banana peels, used syringes, old iPods, even raw sewage — to extreme temperatures without combustion. The output includes hydrogen and synthetic natural gas that can be burned to generate electricity or made into ethanol or diesel fuel. The FastOx is now being prepared for delivery to Sierra Energy’s first customer: the United States Army.

Ethanol has long been promoted as an alternative fuel that increases energy independence, and federal law requires the use of greater amounts of it. But most ethanol in this country is produced from corn or soybeans, and many people worry that the mandate is pushing up food prices. Ethanol produced from trash — or agricultural waste, as others are trying — would allay such concerns.

The military is looking for ways to reduce its oil consumption, and to make it easier to supply the front lines with the fuel it uses in all its vehicles and generators. “These days, the supply lines are in the battlefield,” said Sharon E. Burke, the assistant secretary of defense for operational efficiency plans and programs. “And we consume a lot of fuel, which makes us a big target.

The FastOx gasifier is the brainchild of two former engineers at Kaiser Steel, patented by the grandson of one of them and commercialized by Mr. Hart. “It’s a modular system that can be dropped into any area,” Mr. Hart said, “using waste where it’s produced to make electricity where it’s used.” Once it’s off the ground, he said, “garbage will be a commodity.”  

Gasification is more efficient than incineration and eliminates toxic byproducts that come from burning trash. But it was especially appealing from a business point of view because it relied on a proven technology and used materials in wide abundance: blast furnaces being abandoned as the American steel industry was collapsing.

“What was compelling from the start,” Mr. Soderquist said, “was repurposing existing infrastructure into a generator of clean energy, with a second revenue stream from people paying you to take their waste.”

Results at the Defense Department’s testing facility near Sacramento have been promising; after about four hours, one ton of waste creates enough gas to produce 1,580 kilowatt-hours of electricity, which would power an average home in the United States for about a month and a half — at one-third the emissions of coal — and 42 gallons of renewably sourced fuel. And that’s with a 12-ton-a-day gasifier; existing blast furnaces can handle as much as 2,000 tons a day.

“California produces 30 million tons of garbage a year,” Mr. Hart said. “If it decided to turn its waste into clean fuels, at that rate it could meet all its oil consumption needs and still export more fuel than some OPEC members.” That is, if the FastOx can do what no other waste-to-energy gasification technology has done before: take any kind of trash, in any succession, without additional separation or preparation.

Any waste-to-energy plan, however, must overcome a major hurdle: the wild inconsistency of the waste stream. “Until you’ve demonstrated that you can handle it all, nobody’s interested,” Mr. Hart said. “I can understand it; they’ve heard similar promises before. We’ve got 150 cities, communities and businesses lined up to be Serial No. 2. Nobody wants to be No. 1.”

NOBODY, that is, except the Pentagon. The Defense Department is the country’s largest single consumer of energy, spending $15 billion a year just on fuel.

The appeal of Mr. Hart’s Pathfinder system is that it would produce fuel on site, eliminating the need to truck in fuel to dangerous military outposts. It would also reduce the need for trash-burning on bases, which creates pollution and noxious odors that have contributed to locals’ distaste for the American presence in Iraq and Afghanistan.  As a result, United States forces in Afghanistan are working to close burn pits.

Ms. Burke added, “Something for military operations has to be really rugged, deployable, simple to use — all of those things.” Consultants and municipal sanitation officials who’ve looked at the FastOx say it meets those criteria.

“Waste is a problem,” Ms. Burke said. “So if we could dispose of waste and create energy at the same time, that would be a silver bullet.”

Whats not to love about this story? An idea for turning trash-to-fuel, a seemingly futuristic and complex concept, with its origins in a 1980s steel plant. The process does not require complex new technology, but instead relies on modified blast furnaces, which are abundant due to the decline of the U.S. steel industry. Utilizing recycled capital and infrastructure only makes waste-to-fuel more appealing from a sustainability and affordability point of view. 

The idea was scoffed at, evolved through trial and error and by chance, and today has become the first trash-to-fuel concept to be adopted by the U.S. D.o.D. With minimal government aid (the article cites $8 million dollars from the federal and state government), and a little bit of American ingenuity and determination, garbage may someday be worth its weight in gold (not literally, but as the article says it will be a commodity, not a liability).

A little more research into the D.o.D energy consumption further emphasized the importance of “greening-up” D.o.D operations:

DoD analyses over the last decade have cited the military’s fossil fuel dependence as a strategic risk and identified renewable energy and energy efficiency investments as key mitigation measures.

As the largest energy consumer in the United States, the federal government plays an important role in the country’s energy system. In recent years, a number of factors have led it to reduce fossil fuel dependence through investment in renewable energy and energy efficiency, including supply risks, high and volatile prices, and environmental impacts. In fiscal year 2010, DoD spent $4 billion on installation energy and $11 billion on operational energy. The full cost of fuel can be as high as $400 per gallon by the time it is delivered to a remote Forward Operating Base.

Recent U.S. Military operations in the Middle East have been too closely associated with U.S. energy interests. It is hypocritical to cite foreign energy dependence as a national security threat and not do everything in your power to reduce your own organization’s reliance on those very same energy sources.

I often write about the sustainability of U.S. military endeavors from an opportunity cost (programs we can’t afford as a nation because of high military spending) and human loss perspective. This form sustainability is about knowing when to use military intervention and when to pursue other means of foreign policy, within the D.I.M.E. paradigm. However, sometimes military intervention is necessary; another manifestation of military sustainability is ensuring that day-to-day operations and necessary military interventions are carried out in the most environmentally sustainable way as possible.

Furthermore, according to the NYT article, less reliance on fossil fuels would reduce the number of military deaths; “about half of United States casualties in Iraq and Afghanistan between 2003 and 2007 were of servicemen and servicewomen moving and protecting fuel convoys, according to an Army report.”

As a nation we spend a lot on military programs–far more than any other country. We also consume a lot of energy; these two characteristics of America are not completely independent of one another. Both of these forms of sustainability are about making sure every dollar that goes to the D.o.D. is truly needed an fully utilized, as it is one dollar that cannot go to a school, hospital, infrastructure project, or any other public good / program (not to mention both reforms would directly save lives). There are arguments for and against reducing military spending, which I will not get into here. It is, however, indisputable that the D.o.D. and the D.o.S. should work together in order to operate in the most strategic and environmentally sustainable way possible.

Waste-to-energy is a promising concept that could eventually transform how the military and municipalities deal with waste–I’ll be sure to keep my readers up-to-date about this exciting experiment.


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Transparency Report: The Global Partnership for Development, Global Commons, and Common But Differentiated Responsibilities.

A recurring topic here at NN is how globalization has shifted some of the most pressing political economy decisions away from national governments and into the global governance arena, where the rules are largely being drawn up as we go. Never has the world been as globalized as it is today, and we can be certain that tomorrow will only lead to further integration. 

A number of problems inherently arise in issues of global governance. There are innumerable public and private interests at work, none of which want to give up their legal/structural advantage for the greater global good. Politicians must balance the short-run interests of domestic actors with the long run interests of the global community (but only one of those groups is responsible for that politicians future job prospects). This may lead to a “free rider problem”, where a country may decide it will simply reap the benefits of global governance (which tend to be non-excludable), while not contributing anything (and by further complicating an already complex and differentiated international legal/policy/taxation order, undermining global governance initiatives). Differences in national regulations can lead to capital flight to low cost countries, creating another incentive to “cheat” on global commitments.

One way to overcome free-rider problems is to create forums or groups where countries can coordinate their policies and voice grievances with one another (and shine a spotlight on “cheaters” and “free riders”). The G-20 is one such organization. The 3G Global Governance Group is a similar group comprised of 30 more countries. Critics and proponents of such groups often bicker over the merits and limitations of inclusivity versus exclusivity–I am of the mind that if the stated goal is coordination, cooperation, and some element of global policy coherence, then the more the merrier. This does not mean we need a G-193; groups can determine for themselves their level of exclusivity, as long as they can interact together through global mechanisms such as the United Nations.

The concept of “common but differentiated responsibilities” in reference to the “global common”, has until this point been used almost exclusively in the environmental and natural resource arena. I would argue that both of these terms have a much wider application. Global commons should refer to any non-excludable good / service, with positive / negative externalities, whose effective management requires global coordination (to overcome cheater and free-riders). This new definition would include, among other things: environmental regulation, trade openness, financial and tax policies, issues of regional and global security and human rights concerns (and yes these are all interrelated issues, further boosting the argument for global coordination in tackling them).

By re-framing the concept of global commons, a new global partnership for development can take root through the UN Post-2015 Development Agenda, with the concept of common but differentiated responsibilities at its core. This concept itself will make countries more willing to coordinate on global commons issues. By acknowledging that countries are accountable to different degrees for the current state of global affairs, a basis for financing global initiatives that is fair yet acknowledges common goals all countries should be working towards can emerge. By “common but differentiated” I do not mean that countries should have different policies–quite the contrary. The “common” aspect refers to creating programs with global policy coherence, the “differentiated” aspect refers to how those programs will be financed in a way that allows them to fully realize their goals (as opposed to unfulfilled commitments that have dominated global agreements in the past).

Perhaps such commitments would be a more sustainable and effective way for donor countries to channel ODA, freeing up fiscal space for national governments in developing countries to finance their own domestic development programs without the distorting effects that large aid inflows can have.  

The G-20 is currently focusing on the issue of corporate tax evasion. (for a refresher, in a previous blog I explored the costs to society of corporate tax evasion)

“Government officials from the world’s largest and richest economies on Friday for the first time endorsed a blueprint to curb widely used tax avoidance strategies that allow some multinational corporations to pay only a pittance in income taxes.”

“In light of such practices – which are entirely legal, but take advantage of differing tax rules around the world – the Organization for Economic Cooperation and Development has proposed that all nations adopt 15 new tax principles for corporations. The plan focuses only on corporations and would, if adopted widely, shift some of the global tax burden toward large companies — the ones big and rich enough to devise complex tax-reduction strategies — and away from small businesses and individuals, which tend to spend a much bigger share of their incomes on taxes.

“Shifting profits to low-tax countries and costs to high-tax countries is less an option for small businesses and individuals, who inevitably wind up carrying more of the tax burden as a result. In the United States, for example, taxes on corporate profit contributed 40 percent of all income tax to the United States Treasury 50 years ago. Today, corporations contribute less than 20 percent, with the slack taken up by small companies and those paying individual income tax.”

“In contrast, the owners of a small coffee shop would probably not able to reduce its tax liability by claiming they had paid royalty fees to an overseas company owning the copyright to their cafe’s name.

The reform is intended to address such inequities, the finance ministers said Friday”

“‘It’s a matter of justice and fairness,’ Angel Gurría, the secretary general of the O.E.C.D., said at the presentation of the new plan with the finance ministers of France, Britain, Germany and Russia.”

The list, presented Friday at a meeting of finance ministers of the Group of 20 countries in Moscow, includes ideas to prevent corporations from “treaty shopping” to find countries with the lowest taxes and then find ways to book their profits there, even when much the money is made elsewhere.”

“The details, however, may prove daunting and will be subject to intense lobbying by corporations. In addition, countries have long used tax policies in efforts to lure businesses to locate operations there. The O.E.C.D. plan would not seek to end such competition entirely – any country would be free to charge lower rates than others did — but it would try to keep countries from essentially offering companies ways to avoid paying taxes anywhere, something critics say Ireland did in reaching agreements with Apple.”

“The O.E.C.D. does not expect to complete work on the proposals until the fall of 2015, and after that it would be up to governments and legislatures to implement them by passing new tax laws.”

Government are coming together to address the issue of corporate tax avoidance, which could not be addressed unilaterally. Reform will take a long time and run into intense opposition, but it has to start somewhere, and the G-20 is that somewhere. If the worlds biggest economies agree on rules, smaller countries will follow suit (powerful countries often use economic leverage to secure policy changes). In time, with nowhere left to run, large corporations will have no option but to pay their fare share–to the benefit of all.


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Conflict Watch: Austerity v. Human Rights

Original article:

“Austerity cuts in Spain could lead to the effective dismantling of large parts of its healthcare system and significantly damage the health of the population, according to a study published on Thursday.”

“The study published in the British medical Journal (BMJ) found that Spain’s national budget cuts of almost 14 percent and regional budget cuts of up to 10 percent in health and social services in 2012 have coincided with increased demands for care, particularly from the elderly, disabled and mentally ill.

The researchers also noted increases in depression, alcohol-related disorders and suicides in Spain since the financial crisis hit and unemployment increased.”

“The findings in Spain chime with other studies in Europe and North America which found budget cuts had a devastating effect on health, driving up suicides, depression and infectious diseases and reducing access to medicines and care.”

“‘If no corrective measures are implemented, this could worsen with the risk of increases in HIV and tuberculosis — as we have seen in Greece where healthcare services have had severe cuts — as well as the risk of a rise in drug resistance and spread of disease,’ said Helena Legido-Quigley, a lecturer in Global Health at LSHTM who worked with McKee.”

“In a book published in April, researchers said around 10,000 suicides and a million cases of depression had been diagnosed during what they called the “Great Recession” and the austerity measures that have come with it across Europe and North America.”

This is Spain we are talking about here–a high income, EU country. Perhaps incomes are too high, as unemployment remains above 27.2% (and 57 % for people under 25). Since Spain is a Euro country, it cannot devalue it’s currency to bring its wages back to a competitive level, it must pursue painful “internal devaluation”–a mixture of austerity and structural reform that has a contractionary effect on the economy in the short-run (especially when the fiscal-multiplier is >1, as evidence suggests it currently is).

This is of course unacceptable. Fiscal constraints did not stop large scale financial sector bailouts or military expenditure, but when it comes to financing social programs needed for governments to fulfill their basic human rights obligations there is suddenly no money available. Clearly governments around the world have their priorities out of order.

Unemployment, especially long term unemployment and youth unemployment, has a corrosive effect on society. In America, people are outraged over 8% unemployment, can you imagine a rate 300% higher? 700% higher!? There is literally Great Depression level unemployment in Spain and Greece, now 5 years after the Great Recession began.

The corrosive impact of unemployment creates a vicious cycle of human suffering. A lack of demand leads companies to lay workers off. Lower output leads to less tax revenue for the government, and global economic factors made resources scarcer, driving up borrowing costs. Governments, unable to borrow  money at reasonable rates, must slash social programs and government employment.

The unemployed, increasingly pessimistic, turn to risky behavior, including prostitution and drug use. This in turn leads to greater unfulfilled health needs, including untreated mental disorders. Long term unemployment, drug use, physical and mental illness all deteriorate worker skills, making them increasingly dependent on shrinking government resources. Stigmatization, the idea that the unemployed and homeless are that way because they are lazy or bad, becomes self-fulfilling.

Anti-social behavior becomes the norm, and before long even those who were not directly affected by the economic downturn begin to experience the realities of general societal degradation–increased crime and reduced personal security. Taken to it’s extreme, austerity in the face of a depressed economy lays the groundwork for protracted social conflict (PSC).   

The problem here is that social programs are being cut precisely when people need them the most. Fiscal policy should be counter-cyclical. When times are good, a prudent nation will save money for a rainy day. This is what President Clinton was attempting, and had President Bush’s “starve the beast” tax and military policies not bankrupted America, our national debt would be much lower today.

But America is seen as a safe haven, allowing debt to be rolled-over sustainably despite a high debt/GDP ration. If anything, Obamacare is evidence that the U.S. government is moving in the direction of greater public service expenditure.

This is not the case in Europe. Due to a lack of fiscal integration, peripheral EU countries (the GIPSI countries) suffered from higher interest rates (nobody wanted to lend to them as them scrambled to rescue a failing banking sector) leading to a “sovereign debt crisis”. The European Central Bank eventually decided to play the “lender of last resort” role, but on the condition that economically crippling austerity measures are passed.

It has always been clear that austerity programs have adverse human rights implications. The programs that are cut go predominantly to the most vulnerable people–human rights violations tend to compound one another.

Before we get ahead of ourselves, Europe is not heading for anarchy and regular unchecked violence in the streets. However, in some areas protests have already become the norm, and such a future is not impossible to foresee especially if the combination of depression-level unemployment rates, anti-social behavior, and crippling austerity persists.

Recently, the IMF admitted it was wrong about its the impact it believed austerity would have in Greece. This lesson will be painfully learned in many other countries unless something is done to fix this mistake (ending austerity conditions in order to unlock bailout loans). Admitting you made a mistake is the first step towards redress and accountability–it is past time governments were held accountable for their human rights obligations, in both the developing and developed world.

Only when human rights obligations are fulfilled can we achieve sustainable human development and economic growth, predominantly through the real and creative economies (as opposed to unsustainable economic development based on “financialization“).

However, this is only the first step, now international economic institutions have to “put their money where their mouths are” and make up for the needless suffering caused by general incompetence.

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Economic Outlook: Tax Dodging, Tax Havens, Fiscal Space and Human Rights

Two related pieces caught my eye this morning. Both pieces explore how owners of wealth (be it large corporations, wealthy individuals, or autocratic rulers) benefit from “offshore” financial centers.

The first piece, from the NYT, emphasizes how corporate tax avoidance disproportionately shifts the burden of paying for government services to regular people:

“As muddled and broken as the individual income tax system may be, the rules under which the government collects corporate levies are far more loophole-ridden and counterproductive.

That’s not entirely Washington’s fault. Unlike individuals, multinational corporations can shuttle profits — and sometimes even their headquarters — around the globe in search of the jurisdiction willing to cut them the best deal on taxes (and often other economic incentives).

Much of this occurs under the guise of “transfer pricing,” the terms under which one subsidiary of a multinational sells products to another subsidiary. The goal is to generate as high a share of profit as possible in the lowest-taxed jurisdictions.

A study by the Congressional Research Service found that subsidiaries of United States corporations operating in the top five tax havens (the Netherlands, Ireland, Bermuda, Switzerland and Luxembourg) generated 43 percent of their foreign profits in those countries in 2008, but had only 4 percent of their foreign employees and 7 percent of their foreign investment located there.

All in all, it is a race to the bottom on the part of revenue-starved governments eager to attract even a relatively small number of new jobs.

As a consequence, the effective corporate tax rate in the United States fell to 17.8 percent in 2012 from 42.5 percent in 1960, according to the Federal Reserve Bank of St. Louis. (The share of federal revenues arriving at the Treasury from companies has fallen even more sharply, in part because an increasing number of businesses are taxed as individuals rather than as corporations.)

That’s just not fair at a time of soaring corporate profits and stagnant family incomes.”

“Happily, the gaming of the tax system is becoming a global concern, with an action plan coming from the Organization for Economic Cooperation and Development in July. The O.E.C.D. should work toward taxing business profits where they actually occur, not where they’ve been shifted by some tax adviser.

As we strive for a global solution, we should take a number of interim steps, including better policing of transfer pricing.”

Another piece, written by Jeff Sachs at the Earth Institute, expands on this topic to bring other forms of money-laundering into the mix, as well as crystallizing the fiscal space / austerity argument against tax evasion:

“In recent weeks, citizens in many countries suffering from government budget cutbacks have been learning more and more about one of the biggest and most dangerous scams in the world: the global web of tax havens that U.S. and European politicians and bankers have nurtured over the years. The only real purpose of these havens is to facilitate tax evasion, money laundering, bribery, and lack of accountability for environmental and social calamities inflicted by international companies.”

“During the boom years, the rich and powerful kept the public distracted from the tax haven reality. Yet now with budget austerity, the public is having a close look at tax evasion by the rich and powerful. As a result, the veil over the tax havens has started to slip, and the sight is not lovely.”

“The politicians of rich nations who protect the exorbitant privileges of bankers and hedge-fund managers, who wink at mega-tax evasion by billionaires, and who tolerate unpardonable games played by major companies, are playing with fire. We are now all sharing austerity. The havens represent unacceptable privilege and abuse, not fair sharing.”

“Developing countries too are saying that enough is enough. For decades they’ve been on the receiving end of hypocritical lectures about good governance. For them, the tax havens have served the purpose of paying bribes to potentates, and providing easy ways for elites to keep their money safe from tax collectors. Yet it is the rich countries that have fostered that system.”

The existence of tax havens represent the political power of the ultra-wealthy and the collective-action problem facing the rest of the world. However, the internet and watchdog groups, along with crushing austerity programs in the wake of The Great Recession, have thrust tax-avoidance into the spotlight. This is the first step towards pressuring governments for real, coordinated action against this unfair practice. 

At best, tax-havens allow wealthy people to avoid paying their fair share of taxes. Every dollar not paid in taxes is a dollar more of debt for a government, a dollar less available for an important social program. Forget the moral and ethical implications of this “reverse-Robin-Hood” system for a minute. Economically speaking, this system leads to stagnant growth. Less wealthy people have a higher average and marginal propensity to consume, and tend to keep their money in their home country. Also, diminishing marginal utility of money states that less wealthy people (in the aggregate, there is of course there is anecdotal evidence against this point), spend a greater percentage of their money on things that are beneficial for social welfare. The current system provides for less, more wasteful consumption. It corrodes the “American Dream” by reducing social mobility and perpetuates income inequality. And this is what I would consider the “best case scenario”.

At worst, tax-havens offer a stable place for oppressive regimes to park their money. Elites can amass rents from a variety of places (most commonly extractive industries, or through black-markets / drug trade), and know that they have a safe place to keep that money. This money can then be used for personal reasons, or to build up a military to further entrench Elite control–particularly in less developed countries where democracy does not exist. It is not difficult to draw the link between entrenching autocratic, rent-seeking regimes, and human rights abuses.

A Reuters blog about the book “Treasure Islands”, by Nicholas Shaxton, articulates this point very well. “The broad brush — and this is a simplication of the overall argument — is that tax havens enable the flight of scarce capital from Africa to other regions, stunting the continent’s ability to develop on a range of fronts. Such havens inclue not only tropical destinations like the Cayman Islands but the City of London and the U.S. state of Delaware.” The book “Offshore: Tax Havens and the Rule of Global Crime”, by Alain Deneault, makes a similar argument.

The U.N. recently passed an Arms Treaty, with human rights considerations at it’s core. While arms trade was a natural starting point,  I believe this is a strong model for all international transactions. Any time large amounts of money are transferred, be it tax-avoidance or the hiding or ill-gotten gains, this money has the potential to fund / perpetuate human rights abuses. The sooner the international community realizes this, and acts in a coordinated fashion to review and (act on) the human rights implications of ALL financial flows, the sooner we will see a meaningful reduction in human rights abuses around the globe.

The U.S. famously prosecuted Al Capone, not for criminal activities, but because of tax avoidance. Autocratic regimes are in many ways similar to mafias, and they enjoy the additional protection of “national sovereignty” which allows them to continue to abuse human rights with relative impunity. Maybe we can take a page from history and allow the paper-trail bring down some of today’s worst human-rights abusers. Of course this would require a strong international justice system–with real punitive powers–which unfortunately does not currently exist.

The best case scenario of tax-avoidance is it unfairly shifts the burden of paying for government services from the wealthy to the not-wealthy, which compromises the ability of governments to pay for social programs. The worst case scenario is the perpetuation of human-rights violations. Obviously neither of these outcomes should be tolerable–we can only hope that a silver-lining of The Great Recession is that it will force governments to work together to tackle the issue of tax-avoidance and offshore financial centers, which affects developed and developing countries alike.          

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Conflict Watch: Oil Sand and Renewable Energy, a New Case for a Carbon Tax / Cap and Trade

An interesting piece in the NYT about how a less incentive-laden renewable energy sector in Europe is actually helping the industry grow “sustainably”:

“Europe used to be nirvana for companies in the clean-energy business, but in the past couple of years it has become a much tougher place. With economies anemic, electricity demand is down; and, not surprisingly, once-generous subsidies that encouraged installing swaths of solar collectors in sun-poor Germany or wind farms in relatively calm areas of France are either being reduced or look as if they could be.

But for some people and companies, the harsher environment is fostering a tough-minded approach that may be healthy for the effort in the years ahead to curb the greenhouse gases that are blamed for global warming.

Europe’s struggles, for instance, pushed Enel Green Power, one of the world’s largest electricity generators from renewable sources like wind and solar, to explore markets like Brazil, Chile and Mexico, that may turn out to be a lot more promising than Europe.”

“Contrary to the practice in much of Europe, where subsidies are used as a lure for renewables projects, developing countries like Brazil often award contracts to build new power capacity through competitions that sometimes pit clean energy against fossil fuels like natural gas and diesel. For instance, Enel Green Power recently won wind power deals in Brazil in bake-offs that included proposals for natural gas-fired stations.

‘There was a competitive approach to renewables that we liked a lot,’ said Francesco Starace, the company’s chief executive'”

“Mr. Starace especially likes long-term deals like the ones he has worked out in Mexico with Nissan and Nestlé to build wind farms to supply factories with power. He hopes to replicate this sort of arrangement across emerging markets, including east Africa. These private, one-on-one arrangements are more sustainable, he figures.

You don’t run the risk of a regulator or a state coming back at you and saying, ‘Guys, the good days are over, now we have to talk about reducing this and that,’ he said.”

“The goal of the renewables business, Mr. Murley said, should be to be competitive eventually on costs with other energy sources and not to rely on subsidies. He also believes in building businesses like his clusters of Swedish wind farms that have the scale to engage a team of managers and the clout to cut better deals with suppliers. His organization tries to buy turbines and other equipment that are reliable rather than cheap and does not skimp on spending money on maintenance.

The closer you are to the wholesale price of power, the less you are at risk,’ he [Tom Murley of HgCapital] said. He is also investing in onshore wind projects in Ireland, where the operating environment resembles that of Sweden.”

Talking about the “sustainability” of the renewable energy sector may be an interesting choice of words, but how the renewable energy sector matures is yet to be decided. Perhaps a rethinking of the subsidy approach to developing renewable energy would be a good think, if a more efficient complimentary / substitute path is proposed. Subsidies distort markets, so governments must have a credible threat that they will stop providing subsidy support if companies in the industry do not mature as they are  supposed to. But pulling the plug on subsidy programs is a bad move politically–it is always difficult to find politicians that are willing to let jobs leave their municipality.

What you get is subsidies and tax-breaks that are not at all linked to any real C-B analysis or long term commitment from companies (Another reason that making MNC themselves finance sustainable energy infrastructure makes sense as it locks the company into a longer term commitment–the cost of closing up shop is greater).  Some tax breaks and subsidies are good ideas, but they should be based on adequate C-B analysis and should contain long-term legally binding commitments. Additionally, tax breaks and subsidies for “dirty-energy” have to go, so that these two competing industries can actually compete on common ground. If we are considering an approach to scale back subsidies for an “infant industry”, removing subsides for a more mature competing industry must be part of that approach.

Ending tax breaks for “dirty energy” brings us to the next point of this article, which is the argument for some sort of carbon-tax or cap-and-trade system. If we are not going to reward the renewable energy industry for its implicit positive externalities, we should make dirtier forms of energy pay for their negative externalities. An article about “petroleum coke” highlights the need for something to keep emissions in check:

“Assumption Park gives residents of this city lovely views of the Ambassador Bridge and the Detroit skyline. Lately they’ve been treated to another sight: a three-story pile of petroleum coke covering an entire city block on the other side of the Detroit River.

Detroit’s ever-growing black mountain is the unloved, unwanted and long overlooked byproduct of Canada’s oil sands boom.

And no one knows quite what to do about it, except Koch Carbon, which owns it.

The company is controlled by Charles and David Koch, wealthy industrialists who back a number of conservative and libertarian causes including activist groups that challenge the science behind climate change. The company sells the high-sulfur, high-carbon waste, usually overseas, where it is burned as fuel.”

““What is really, really disturbing to me is how some companies treat the city of Detroit as a dumping ground,” said Rashida Tlaib, the Michigan state representative for that part of Detroit. “Nobody knew this was going to happen.” Almost 56 percent of Canada’s oil production is from the petroleum-soaked oil sands of northern Alberta, more than 2,000 miles north.”

“Detroit’s pile will not be the only one. Canada’s efforts to sell more products derived from oil sands to the United States, which include transporting it through the proposed Keystone XL pipeline, have pulled more coking south to American refineries, creating more waste product here.”

“And what about the leftover coke? The Environmental Protection Agency will no longer allow any new licenses permitting the burning of petroleum coke in the United States. But D. Mark Routt, a staff energy consultant at KBC Advanced Technologies in Houston, said that overseas companies saw it as a cheap alternative to low-grade coal. In China, it is used to generate electricity, adding to that country’s air-quality problems. There is also strong demand from India and Latin America for American petroleum coke, where it mainly fuels cement-making kilns.

“I’m not making a value statement, but it comes down to emission controls,” Mr. Routt said. “Other people don’t seem to have a problem, which is why it is going to Mexico, which is why it is going to China.”

“It is worse than a byproduct,” Ms. Satterthwaite said.“It’s a waste byproduct that is costly and inconvenient to store, but effectively costs nothing to produce.””

“Lorne Stockman, who recently published a study on petroleum coke for the environmental group Oil Change International, says, “It’s really the dirtiest residue from the dirtiest oil on earth,” he said.”

–Here we have an example of billionaire industrialists selling oil and shipping the dirty byproduct around the world to be burned, releasing even more emissions. And how much does all this profit-generating business pay for it’s emissions? Essentially zero. Oil sand creates 3rd degree pollution (burning of the oil, transportation of petro-coke, and burning of the petro-coke), and because of their lobbying power, industrialists are able to shift the cost onto future generations.

It is appalling our government, and other governments, let companies do this without paying anything for the emissions they produce.  Companies claim they cannot deal with a carbon-tax or cap and trade, while posting billion dollar profit margins. At the end of the day, a carbon tax is a small blip on the companies cost-function. Cap and Trade would initially not even make emissions more expensive, as the market is depressed (due to lower energy demand following the Great Recession) and swamped with low-price / free vouchers. For these reasons, a carbon tax would likely be more effective in the short-run, but having either system in place would be better than what we have now (which is essentially having no system in place to check emissions).

Corporate interests will always claim the sky is falling, and that any additional cost will bring that industry to it’s knees, forcing  them to outsource jobs and close operations. What we would see , I imagine, is that if you call this bluff, often companies will decide the cost and uncertainty of relocation is not worth the small price of paying for emissions (especially if that company had to install, say, a wind-farm when it started operations). If companies want access to developed countries markets, they should have to pay for their emissions. If America and Europe came up with a strong carbon-market (perhaps part of a larger U.S.-Europe FTA?), the rest of the world would join in. The ultimate goal would be a global carbon-market, which would eliminate the threat of companies to move operations to a lower regulation  area.

A double sided approach–ending subsidies / tax-breaks for both renewables and “dirty-energy”, combined with a carbon-tax / cap-and-trade system, could allow market forces to help renewable energy prices converge towards the price of more traditional forms of energy. It would do so while creating a more resilient renewable-energy industry, create a cleaner environment, and open up fiscal space for spending on important social programs.

This approach is different, and theoretically sound–it would be very interesting to see how effective a pilot version of this program could be.

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