Normative Narratives


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

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

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

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

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

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

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

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

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

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

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

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

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

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

Relaxed Regulations:

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

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

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

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

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

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

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

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

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

Lax Regulation:

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

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

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

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

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

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

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

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

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

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

Too-Big-To-Regulate:

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

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

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

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

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

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

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

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

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

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

The time for meaningful action is passing us by.

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Economic Outlook: Magic Asterisks v. Cross-Country Analysis

imageunemploy

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

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

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

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

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

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

The Case For Austerity–Magic asterisks:

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

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

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

The Case For Stimulus–IMF Cross Country Analysis:

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

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

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

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

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

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

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

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

What Does “American Exceptionalism” Mean to You?:

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

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

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

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

Debt Sustainability, MMT, and Context Sensitive Macroeconomics:

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

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

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

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

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

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

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


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Economic Outlook: Europe (Finally) Gets It’s Stimulus Program

Youth Unemployment Europe October 2013

After EU Parliamentary elections in late May, many people were concerned (or jubilant, depending on the circles you run in) about gains by anti-EU “Euroskeptic” parties. These parties did not gain enough seats to dictate policy, but they did gain a platform to push their agenda in future policy decisions.

For every action, their is a reaction. It seems that gains from anti-EU parties have refocused pro-European forces, forcing them to adopt more “people-friendly” policies to counter the depression level unemployment rates (which have hit young people particularly hard).

As any development economist will tell you, youth unemployment presents many unique problems, both individual (high depression rates, future income losses “wage scaring”) and societal (increases in criminal / anti social behavior, drags on economic growth).

Systematic under-investment in young people is short sighted economically and causes untold human suffering. Such under-investment, while always reprehensible, is not surprising in the worlds least developed countries (LDCs), but this is Europe we’re talking about here.

Europe’s leaders have responded with pragmatic policies in recent months (finally, it only took 5+ years!). In Early June, the European Central Bank took the unprecedented step of introducing negative interest rates for keeping deposits in the ECB, a policy likely to not be popular with people who have wealth to invest, but which nonetheless should help spark short-term economic growth.

In arguably more meaningful news, last week the European Parliament announced a “Public-Private” stimulus program:

Jean-Claude Juncker won a wide endorsement from the European Parliament on Tuesday to be the next head of the executive European Commission after setting out a “grand coalition” investment programme to help revive Europe’s economy.

Belying his reputation as a grey back-room fixer, Juncker spoke with passion of his ambition to “reindustrialise” Europe and put the European Union’s 25 million unemployed, many of them young, back into work.

He promised a 300-billion-euro ($409-billion) public-private investment programme over the next three years, combining existing and perhaps augmented resources from the EU budget and the European Investment Bank with private sector funds, to build energy, transport and broadband networks and industry clusters.

“We need a reindustrialisation of Europe,” the 59-year-old former Luxembourg prime minister said. He won support from the Socialists and Liberals as well as his own centre-right bloc, the largest in the EU legislature.

Juncker acknowledged many Europeans had lost confidence in the EU and said only economic results and full employment, not endless debate over EU institutions, would restore their trust.

…his emphasis on public investment, reaffirmation of a target of raising industry to 20 percent of EU economic output and call for a minimum wage in each EU country, were designed to appeal to the left.

In a speech delivered in French, German and English, Juncker sought to reassure Germany and other north European fiscal hawks that the 28-nation bloc’s strict rules on budget deficits and debt reduction would be maintained.

Juncker said euro zone countries should get financial incentives if they make ambitious structural economic reforms, funded by the creation of a separate budget for the 18 countries in the currency area.

He also vowed to protect public services in Europe from what he called “the whims of the age” – an apparent reference to privatisation and restrictions on state aid.

Europe’s stimulus act will not be a panacea. By all accounts, EU countries (with the exception of Germany) have recovered much more slowly from The Great Recession than the U.S. Unemployment remains too high, and is especially troubling in certain countries and demographics.

Compounding the problem, this stimulus budget is too small to adequately address the problems facing the EU. The American Reinvestment and Recovery Act (ARRA) was less effective than imagined largely because it wasn’t big enough, and it’s funds came in at almost twice as much as its European Counterpart ($831 billion vs. $490 billion).

However, only 2/3 of the ARRA was in the form of spending, while the remainder took the form of tax breaks (which, in the context in which it was passed, had a much lower “fiscal multiplier” than direct spending). The European program seems to be more spending focused, meaning dollar for dollar (or euro for euro) this smaller stimulus plan may go further in addressing the social and economic problems facing the EU. The EU plan also leverages public funds to stimulate private investment–Europe’s leaders are doing what they can given budgetary constraints barring a larger stimulus program.

Combined with the ECB’s negative interest rates, EU leadership is proving it has moved past “bleeding the patient” and is taking a more proactive approach to economic recovery. I know it is hard to get excited about European leadership learning lessons after 5+ years of policy failure, but better incomplete and late than never, right?

While generally well received, this program has its notable detractors, headed by “Euroskeptics”, fiscal hawks, and Britain. Britain and other non-Euro EU countries must make their own decisions about their future in the EU based on what they believe is in their country’s best interests. As French President Hollande said last year, “I can understand that others don’t want to join (the single currency). But they cannot stop the euro zone from advancing.”

Sometimes you have to cut off the limb to save the patient. For the euro zone to survive, closer fiscal, taxation, and regulatory integration are needed. If Britain or any other country cannot accept this reality, they must seriously questions their future position within the EU (which, it seems, Britain will do with a membership referendum next year).

Leaving the EU need not be marked with retaliatory economic barriers or deteriorating political relationships; it could be done in a way that largely preserves existing interdependence while opening avenues for greater policy flexibility. As no country has ever left the EU, the punitive impacts of such a move are undecided. Like any breakup, it could be ugly and painful, or it could be clean and leave the possibility of “remaining friends”. 

 


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Economic Outlook: Why Economics Failed (EU Edition)

Special thanks to Dr. Darryl McLeod for the graph!

The Importance of A Strong EU:

In 2012, The European Union won the Nobel Peace Prize, a symbolic award mean to show appreciation for the global importance of a unified European in the midst of the continents  most serious economic downturn since WWII:

The European Union‘s three presidents have collected the Nobel peace prize in Oslo in recognition of six decades of work promoting “peace and reconciliation, democracy and human rights”.

David Cameron was one of six EU leaders who decided not to attend. But his deputy, Nick Clegg, was there to represent the UK at the Nobel Institute.

Attendees heard the Nobel committee president, Thorbjoern Jagland, praise the EU’s role in transforming a European “continent of war” into a “continent of peace”.

“That should not be taken for granted – we have to struggle for it every day,” he said.

European commission president, José Manuel Barroso, said: “This is an award for the European project – for the people and the institutions – that day after day, for the last 60 years, have built a new Europe. “We will honour this prize and we will preserve what has been achieved. It is in the common interest of our citizens. And it will allow Europe to contribute in shaping that ‘better organised world’ in line with the values of freedom, democracy, human rights and rule of law that we cherish and believe in.

Indeed, I have advocated for a stronger role for Europe in ensuring global security, promoting democracy, human rights and rule of law throughout my “End of Team America World Police” series. Europe has to play a greater role in security both for budgetary and practicality reasons; it is much closer to Africa and the Middle East, the U.S. public is war weary, and we cannot have groups such as Boko Haram, ISIS (Islamic State of Iraq and Syria), and the Yemen-based Al Qaeda in the Arabian Peninsula thinking they can act with impunity (or join forces).

The EU is currently holding parliamentary elections, and anti-EU parties expect to gain seats:

These far-right and far-left groups will not win anything approaching enough seats to take control. But they could get around a quarter of them, amplifying their voice in debate and giving them more opportunities to slow down measures that the Brussels bureaucracy and international economists say could help save Europe from a Japan-style “lost decade” of anemic growth and policy stasis.

These include initiatives to bind the 18 countries that use euro currency closer together and open up Europe’s markets to greater competition, including from the United States.

Set up in the 1950s as a common assembly to introduce an element of democracy into the nascent European project, the parliament became directly elected in 1979 as part of push to narrow the chasm between Europeans and the arcane work of integrating their economies that few ordinary people cared about and even fewer could understand.

This anti-EU sentiment, while expected during times of economic downturn, is actually counter-effective. The issue holding back the EU recovery is insufficient integration; and this is not news. Since well before the existence of the Euro, economists have known that while some factors favored the chances of Eurozone success (such as geographic proximity and high level of trade, what is sometimes known as the gravity theory of international trade), others factors raised red flags (lack of fiscal integration, cultural and language differences which hold back the flow of residents from high unemployment to low unemployment areas).

The U.S. is an optimal currency union; everyone speaks English, and can move about the country fairly easily. Furthermore, we have the worlds largest Federal Government and most powerful National Bank anchoring the economy. As bad as the Great Recession was in America, it was irrefutably worse in Europe (and not because of their generous social welfare systems, because of the lack of fiscal integration).

And now the anti-EU sentiments are hunkering down for the zombie apocalypse, instead of fostering the closer bonds (both fiscal and cultural) needed to return the EU to a position of global leadership and prosperity. A strong unified Europe is important both for the European Economy and global security and development, hopefully whoever wins seats in the EU Parliamentary Election understands this.

Why Economics Failed:

This anti-intellectual refute of economic theory reminds me of a recent Paul Krugman Op-Ed, “Why Economics Failed”:

On Wednesday, I wrapped up the class I’ve been teaching all semester: “The Great Recession: Causes and Consequences.” (Slides for the lectures are available via my blog.) And while teaching the course was fun, I found myself turning at the end to an agonizing question: Why, at the moment it was most needed and could have done the most good, did economics fail?

I don’t mean that economics was useless to policy makers. On the contrary, the discipline has had a lot to offer. While it’s true that few economists saw the crisis coming — mainly, I’d argue, because few realized how fragile our deregulated financial system had become, and how vulnerable debt-burdened families were to a plunge in housing prices — the clean little secret of recent years is that, since the fall of Lehman Brothers, basic textbook macroeconomics has performed very well.

But policy makers and politicians have ignored both the textbooks and the lessons of history. And the result has been a vast economic and human catastrophe, with trillions of dollars of productive potential squandered and millions of families placed in dire straits for no good reason.

Essentially, economics didn’t fail, policy-makers failed ECON 101. Any economist worth a damn understands that economics is always “context-sensitive”. Appropriate economic policies are different during “good times” and economic downturns; economic policy should be “counter-cyclical”, saving up during good times to pay for essential safety net and stimulus programs out of a surplus in bad times. Instead we had the Bush Administration give tax breaks during good times, part of a much larger misguided concept of “starve-the-beast” economic policy.

Of course one could argue most policymakers are aware of the economics and just beholden to vested interests, in which case I would say your probably right more often than not.

And amazingly, across the pond. a parallel dismissal of textbook economics is also playing out in Europe. Instead of pursuing closer fiscal and cultural integration, the EU seem to be drifting apart.

Economics: Art or Science?

I have always believed that Economics is more “art” than “science”, particularly when it comes to responding to crises. In such instances, policy responses have to be made before robust economic analyses can be conducted; policy makers have to rely on intuition and historic lessons, alongside economic theory and context.

But it is not scientific deficit which has led economics to “fail” in recent history. From dogmatic misinterpretation of Adam Smiths “Invisible Hand” (only in the presence of proper safeguards and regulations), to the inflationary / rising borrowing cost effects of fiscal expansion (not in a liquidity trap), to the benefits of currency unions (but only under certain conditions, as explained above), it has been an inability / unwillingness by “conservative” factions on both sides of the Atlantic to grasp the conditions in which certain economic theories operate. As an economist, the solutions to the short-term problems facing advanced economies are frustratingly obvious.

Sometimes I think the only solution is teach everyone economics and political science once in middle school and again in high school. In a functioning democracy people set the agenda, does it not make sense invest in an informed (and therefore more engaged) citizenry?

America the Anecdotal:

America has indeed become the anecdotal nation. We do not have to be, it is a collective conscious choice we have made (or a series of choices we choose not to make). It seems Europe has become anecdotal as well.

Maybe it is part of a concerted effort by fast food chains and entertainment conglomerates to brainwash…No–we cannot blame conspiracies. Sure, vested interests will do all they can to maintain power imbalances, but is this really an excuse, or have the people who live in the world’s most modernized, democratic societies just become lazy and complacent?

I leave my readers with a quote from Matt Taibbi’s best seller “Griftopia”, “America is no longer a country that cares about experts. In fact, it hates experts. If you can’t fit a story into the culture-war storyline in ten seconds or less, it dies. (2 Taibbi references in blogs this week; you go Matt!)

It takes a bit more civic responsibility to build egalitarian, progressive societies; I for one think it’s worth the effort.    


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

Source: The Employment Policy Network (Huffington Post)

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

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

THE BOTTOM (high school graduates):

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

THE MIDDLE (bachelors and graduate degree earners):

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

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

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

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

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

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

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

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

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

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

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


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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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Economic Outlook: The G20, Austerity v. Stimulus, Growth and the Right to Development

Original article:

“The Group of 20 nations pledged on Saturday to put growth before austerity, seeking to revive a global economy that “remains too weak” and adjusting stimulus policies with care so that recovery is not derailed by volatile financial markets.”

“Finance ministers and central bankers signed off on a communiqué that acknowledged the benefits of expansive policies in the United States and Japan but highlighted the recession in the euro zone and a slowdown in emerging markets.”

“Officials backed an action plan to boost jobs and growth, while rebalancing global demand and debt, that will be readied for a G20 leaders summit hosted by President Vladimir Putin in September.

 “Sources at the meeting said Germany was less assertive than previously over commitments to reduce borrowing to follow on from a deal struck in Toronto in 2010, with the improving U.S. economy adding weight to Washington’s call to focus on growth.

With youth unemployment rates approaching 60 percent in euro zone strugglers Greece and Spain, the growth versus austerity debate has shifted – reflected in the fact that G20 finance and labor ministers held a joint session on Friday.”

“The G20 accounts for 90 percent of the world economy and two-thirds of its population – many living in the large emerging economies at greatest risk of a reversal of capital inflows that have been one of the side effects of the Fed stimulus.

One thing we would like to emphasize is the importance of coordination,’ said Indonesian Finance Minister Chatib Basri, cautioning that scaling back policies of quantitative easing elsewhere “immediately affects” emerging markets.”

“The International Monetary Fund warned that turbulence on global markets could deepen, while growth could be lower than expected due to stagnation in the euro zone and slowdown risks in the developing world.

‘Global economic conditions remain challenging, growth is too weak, unemployment is too high and the recovery is too fragile,’ Managing Director Christine Lagarde told reporters. ‘So more work is needed to improve this situation.'”

Yesterday I discussed the coordinating role groups such as the G20 play in today’s globalized economy. That post focused specifically on coordinating efforts to curb corporate tax-evasion. Today’s article emphasizes that fiscal and monetary policies must also be coordinated in order to achieve sustainable human development on a global scale.

Fiscal stimulus efforts must be coordinated; if they are not, the benefits of an individual countries stimulus programs will not be fully realized. Consider a hypothetical jobs program in the U.S. If this program is enacted unilaterally, then depressed demand in export markets (ex E.U.) will cause increased production capacity in the U.S. to lead not to greater trade but surplus goods and lower prices–employment gains will not be sustained by the private sector and will likely be reversed once stimulus money runs out. However, if fiscal stimulus programs were coordinated, and both the U.S. and the E.U. increased productive capacity and income, then a basis for trade and self-sustaining growth could emerge, making fiscal stimulus a short-term “shot in the arm” (as it is intended to be) instead of a permanent program (which is not sustainable for governments and often leads to uncompetitive industries).

Monetary policy must also be coordinated. Quantitative Easing by the U.S. Federal Reserve and the Bank of Japan have injected cheap money into the global economy. Seeking higher returns, this cheap money is often channeled towards emerging markets (such as the “BRICS”). One fear is that once QE policies wind down, emerging markets will experience “capital flight” as higher returns become available in more stable markets. In order to temper this inevitable effect of monetary tightening, both monetary policy coordination and “forward guidance” are needed from major central banks. Bernanke recently reasserted that the Fed will continue bond-buying until U.S. unemployment drops to 6.5% or inflation rises to 2.5%. However, this forward guidance is slightly muddled by ideological differences within the Fed, and amplified by Bernanke’s presumed exit as chairman of the Fed early in 2014. Coordinated monetary policy can provide the clarity needed to assuage markets. In a surprise move a few weeks ago, ECB head Mario Draghi “promised rates will remain ‘at present or lower levels for an extended period of time.’” Indications that the ECB and BoJ are committed to providing liquidity to global markets will make the Feds (eventual and inevitable) retreat from QE less damaging to global markets.   

This G20 meeting has ushered in much welcome news, “in contrast to an ill-tempered G20 meeting in February colored by talk of currency wars.”

About a month ago, I discussed the impacts of austerity programs on states human rights obligations. This post focused a study Spanish austerity and healthcare. The G20 is more concerned with global issues (although Spain and Greece are still a poster children for youth unemployment and the social deterioration that austerity can cause during a recession, and are therefore common examples for pro-stimulus / anti-austerity proponents).

People often consider human rights as positive or negative rights; either the government has to directly provide a good / service or prevent another party from violating human rights. Another aspect of human rights is creating an enabling environment for sustainable human development. “The right to development, which embodies the human rights principles of equality, non-discrimination, participation, transparency and accountability as well as international cooperation, can guide our responses to a series of contemporary issues and challenges. The right to development is not about charity, but enablement and empowerment. High Commissioner for Human Rights Navi Pillay has called on governments and all concerned…to move beyond political debate and focus on practical steps to implement the Declaration. ‘States have the duty to cooperate with each other in ensuring development and eliminating obstacles to development,’ according to the Declaration (full text here).”

One essential element of the right to development is the international recognized “right to work”. Article 23 of the Universal Declaration of Human Rights states, “Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment.” This right is a particularly important aspect of the right to development, as work income provides a means of self-determination and the ability reduce dependence on welfare programs as people attempt to realize their personal goals and aspirations.

Sometimes people do not work because they are lazy, or suffer from physical or mental conditions which impede their ability to find or maintain work. However, when unemployment rates are above 20%, and youth unemployment is above 50%, this can hardly be attributed to laziness (unless you think the world’s lazy people are all collaborating and putting themselves through years of misery in order to remain lazy, but that argument is absurd hard to sell). Such high unemployment levels are due in large part to government inaction / inability to pass stimulus programs, and the negative effects of austerity programs in the face of inadequate private sector demand / personal consumption (this is not stipulation or a normative stance, but rather what textbook economics tells us).

Such high levels of unemployment represent a failure of states to uphold the universal human “right to work”, which undermines the internationally recognized “right to development”.  For years now, economic policy has been dominated by politics and vested interests. It is heartening to see national labor and finance ministers finally coming together to “eliminate obstacles to development”. More concrete programs will probably hopefully be hammered out when heads of state come together in Moscow in September for the G20 leaders summit.

I hope this is not “too little too late”, and that the years since the Great Recession took hold have not lead to “lost generations” of young people who are doomed to a lifetime of anti-social, unproductive, and sometimes criminal behavior (as some people have argued). While there will inevitably be some lifetime dependents resulting from the Great Recession (as there always are from traumatic experiences, be they economic downturns, natural disasters or violent conflicts), I am optimistic that as a whole young adults and the unemployed in general are eager to get back to work once the global policy coherence needed to create those jobs is established. G20 meetings this past week represent a meaningful step in that direction.


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Economic Outlook: Accountability and Oversight in the Financial Sector

In February I wrote a blog titled “Helping the Poor and Changing Our Standards, The DoJ vs. S & P“, and promised to keep my readers up to date on this important case. For those who do not wish to reread that whole post, here are the most pertinent details:

“The Justice Department plans to file civil fraud charges against the nation’s largest credit-ratings agency, Standard & Poor’s, accusing the firm of inflating the ratings of mortgage investments and setting them up for a crash when the financial crisis struck.”

“The Justice Department has decided to sue S & P for $5 billion. S & P contends it did no wrongdoing leading up to the housing crisis. The company will point to the facts that the Fed didn’t even know the severity of the housing bubble just days before it popped, and that its ratings were similar to those of other agencies.”

“The case is said to focus on about 30 collateralized debt obligations, or C.D.O.’s, an exotic type of security made up of bundles of mortgage bonds, which in turn were composed of individual home loans. According to S.& P., the mortgage securities were created in 2007, at the height of the housing boom. S.& P. was paid fees of about $13 million for rating them.”

Here’s the role the DoJ will argue S&P played in perpetuating the housing bubble:

“The three major ratings agencies are typically paid by the issuers of the securities they rate — in this case, the banks that had packaged the mortgage-backed securities and wanted to market them. The investors who would buy the securities were not involved in the process but depended on the rating agencies’ assessments.”

“In its complaint against S&P, the Justice Department accused S&P of defrauding Western Federal Corporate Credit Union, and other institutions that purchased certain securities based on the high ratings by S&P.

Some credit unions are required by law to rely on credit ratings issued by firms that included S&P in making its investment decisions, the complaint said.”

It is my pleasure to inform my readers that a judge has given this case the “green light“, a step towards holding S & P accountable for its role in the financial crisis:

“The U.S. government may proceed with its $5 billion lawsuit accusing Standard & Poor’s of misleading investors by inflating its credit ratings, after a federal judge rejected the rating agency’s effort to dismiss the civil fraud case

In a written decision late on Tuesday, the judge said the government could pursue claims that S&P manipulated ratings to boost profit, and in doing so, concealed credit risks and conflicts of interest.

This led to large losses for investors and contributed to the 2008 financial crisis, the government contended.

“The government’s complaint alleges, in detail, the ways in which none of S&P’s credit ratings represented the thing that they were supposed to represent, which was an objective assessment of creditworthiness, because business considerations infected the entire rating process,” wrote U.S. District Judge David Carter, in Santa Ana, California.”

“The lawsuit accused the largest U.S. credit rating agency of inflating ratings to win more fees from the issuers and bankers that pay for them.

It also said S&P failed to downgrade ratings for collateralized debt obligations despite knowing they were backed by deteriorating residential mortgage-backed securities.

According to the complaint, S&P rated more than $2.8 trillion of RMBS and nearly $1.2 trillion of CDOs from September 2004 to October 2007.”

“S&P argued that, since the issuer banks had access to the same information and models that S&P analysts did, they could not have been fooled by faulty credit ratings,” Carter wrote.

“This begs the question: If no investor believed in S&P’s objectivity, and every bank had access to the same information and models as S&P, is S&P asserting that, as a matter of law, the company’s credit ratings service added absolutely zero material value as a predictor of creditworthiness?”

This is indeed welcome news, as I am sure once the case is underway more information will be brought to light. While I do not take a normative stance on credit agencies in general, the effects of large agencies (such as S & P) ratings on financial valuation cannot be overstated.

To the extent that the lawsuit will explore what role S & P played in perpetuating the financial crisis, and then hold S & P accountable for that role, the judges decision is one that benefits society as a whole by overcoming the power-asymmetry / collective action problem(s) individuals face in holding large institutions to account. Since that is essentially what Normative Narratives is all about, I am happy that the judge will let this case go forward. Of course the wheels of justice move very slowly, so it could still be months / years until a final ruling is made/ appeals finish and any money is paid back, but this decision is a step in the right direction. Any money the U.S. government gets from this case should go towards helping people with refinance underwater mortgages; evidence suggests that low-income families were specifically targeted by lenders in the years leading up to the housing market collapse.

Part of learning from past mistakes is holding the actors who perpetuated / profited from them accountable. Another part of learning from past mistakes is putting safeguards in place to prevent them from occurring again. The former has been addressed on an ad-hoc basis (many would argue not enough has been been done, but lets not allow the unattainable pursuit of perfection get in the way of achievable progress). The later was partially addressed this week with the confirmation of Richard Cordray as the head of the Consumer Financial Protection Bureau:

“The Consumer Financial Protection Bureau was conceived by a Harvard professor, embraced by the Obama administration and pushed into law by Congressional Democrats determined to expand the federal government’s authority to protect borrowers from abusive lending practices”

” [Senator Elizabeth] Warren proposed the creation of a federal agency to protect consumers of financial products in a 2007 article, memorably arguing that the government put more effort into ensuring the safety of toaster ovens than the safety of mortgage loans. The idea resonated with Mr. Obama and his senior advisers, and it became a centerpiece of the administration’s proposal to overhaul financial regulation.”

“‘It is a truly historic day,’ Warren told reporters before the vote. ‘There’s no doubt that the consumer agency will survive beyond the crib. There is now no doubt that the American people will have a strong watchdog in Washington.’”

“…the agency has begun to assert authority over non-bank financial companies, including mortgage and payday lenders, but its actions have been shadowed by uncertainty about the legality of Mr. Cordray’s appointment.”

“‘Today’s action brings added certainty to the industries we oversee and reinforces our responsibility to stand on the side of consumers and see that they are treated fairly in the financial marketplace,’ Mr. Cordray said in a statement.”

It remains to be seen how effective an institution the Consumer Financial Protection Bureau will be. But given the optimism of high ranking officials and the efforts that went into preventing Mr. Cordray’s appointment, it is safe to assume this is big news in the realm of financial reform.

I leave you with words from a previous blog of mine on the subject of accountability, which I believe continues to ring truer and truer with each passing day.

Despite the political and economic cynics out there, who in their great “wisdom” will tell you nothing is happening to hold powerful interests accountable for their role in the financial crisis, we have learned lessons (albeit incredibly hard learned lessons) and are taking steps to ensure we do not repeat our past mistakes.


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Transparency Report: The UK, Kazakhstan, Domestic and Extra-Territorial Human Rights Obligations

Original Article:

“British Prime Minister David Cameron helped inaugurate the world’s costliest oil project in Kazakhstan on Sunday on a trip aimed at sealing business deals but quickly beset by questions over the Central Asian nation’s poor human rights record.

Kazakhstan hopes Cameron’s visit, the first by a serving British prime minister, will cement its status as a rising economic power and confer a degree of the legitimacy from the West it has long sought.”

“With a $200 billion economy, the largest in Central Asia, and deep oil and gas reserves, Kazakhstan is a tempting target. Britain is already among the top three sources of foreign direct investment, according to Kazakh officials.

Since its 1991 independence, officials say British firms have invested about $20 billion in their economy, part of a total $170 billion ploughed into Kazakhstan since then.

But more high profile trade links carry political risks.

New York-based Human Rights Watch said Cameron had a duty to use his trip to denounce human rights abuses.

‘We are very concerned about the serious and deteriorating human rights situation there in recent years, including credible allegations of torture, the imprisonment of government critics, (and) tight controls over the media and freedom of expression and association,’ it said in a letter on Friday.

Answering questions from reporters in Atyrau on Sunday, Cameron said he never put trade and business interests before rights.

‘We will raise all the issues, including human rights. That’s part of our dialogue and I’ll be signing a strategic partnership with Kazakhstan,’ he said.

‘Nothing is off the agenda, including human rights.’

“[Nursultan] Nazarbayev, a former Communist party apparatchik, has overseen market reforms and maintains wide popularity among the 17-million strong population, but has tolerated no dissent or opposition during his more than two decades in power.”

“Nazarbayev, a former steelworker who now holds the title “The Leader of the Nation”, says that he puts stability and rising living standards before hasty political changes in his steppe nation, the world’s ninth-largest by area and five times the size of France.

Comparing Kazakhstan to ‘Asian economic tigers’ like South Korea and Singapore, he has said he wants to turn it into ‘the economic snow leopard of Central Asia’

International human rights law places the state as the central and primary duty bearer for human rights obligations. Human rights include economic, social and cultural rights, in addition to political and civil rights. These rights are indivisible and interdependent, and must be upheld indiscriminately. Certain rights cannot be violated in the name of others—when Nazarbayev says he is putting economic and social progress ahead of political freedoms, he is failing to live up to international human rights law.

The reason behind this is that, without certain political and civil rights, developments are not sustainable. If standard of living gains are made at the benevolence of a dictator, these gains are unlikely to be made in an egalitarian way. Additionally, any gains made can easily be taken away in without any accountability or redress for society as a whole.

The state, however, is not the only actor accountable for the human rights implications of its actions. According to a recent publication, “Who Will Be Accountable”, released by the UN OHCHR and the CESR, “Under international human rights law, States are primarily accountable for respecting and protecting the rights of those within their jurisdiction. The proliferation of actors in international development—from business enterprises and multilateral economic institutions to private foundations—has made it necessary to develop a more multidimensional approach to accountability…However, the notion of shared responsibility has not led in practice to a clearer attribution of the respective and differentiated duties of each of the many actors in the development process. If all parties are responsible for achieving development goals, the risk is that no party can be held accountable for anything. (p 17-18)”

It certainly seems that nobody is willing to take responsibility for human rights violations in Kazahkstan—not the Kazakh government, not Cameron, not UK investors.

Cameron’s government has even been unresponsive to the UK and EU wide effects of austerity on human rights (the UK has been a strong supporter of austerity in the face of the Great Recession). Austerity programs have contributed to the prolonged economic slump in the UK (and the EU as a whole) that is some ways has been worse than even the Great Depression.

One would hope Cameron’s time spent as co-chair of the UN High Level Panel on the Post-2015 Development Agenda would make him more in-tune with the importance of human rights for conflict prevention, economic growth and sustainable human development. Even if it has, it is also clear that Mr. Cameron, as an elected official, has more short-term concerns to deal with.

I am curious to hear what my readers think. Do states and private investors really have extra-territorial human rights obligations? Is it possible for external parties to even affect a dictator’s policies? Can economic and social progress be achieved without political and civil rights? Is international human rights law too idealistic and not pragmatic enough to be realistically applicable?

There is no question that whenever large sums of money are involved, human rights implications will follow. A large investment in Kazakh oil fields will undoubtedly further entrench the rulers.  But if a government is unwilling to listen to even its citizens, will it listen to other world leaders and investors? Perhaps it will—as they say, “money talks”.

Is it realistic to expect UK actors, who greatly need new avenues for economic growth and are seemingly unresponsive to proximal human rights issues, will risk a “slam dunk” investment in order to champion human rights (especially when that demand would likely be rebuffed by an insulated authoritarian regime)?

The stability and security needed for long term investments to pay off seems to exist in Kazakhstan. Is this the extent to which international actors care about human rights issues, or does a greater moral and long-term sustainable human development imperative exist?  

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Economic Outlook: European Youth Unemployment, Public-Private Partnerships and the “Magic” of Fiscal Stimulus

Indepensible Taxing and Spending

Original Articles:

Reuters

“European leaders agreed on new steps to fight youth unemployment and promote lending to credit-starved small business on Thursday after deals on banking resolution and the long-term EU budget gave their summit a much needed lift.

The 27 leaders resolved to spend 6 billion euros over the next two years to support job creation, training and apprenticeships for young people, and to raid unspent EU budget funds to keep the effort going thereafter.

Critics say the money is a drop in the ocean with more than 19 million people unemployed in the EU, and more than half of all young people under 25 without a job in Spain and Greece.”

“Separately, negotiators for the European Parliament, the European Commission and EU member governments clinched a deal on a 960 billion euro ($1.25 trillion) seven-year budget for the bloc for the period 2014-20, ending months of squabbling.”

“The leaders unanimously endorsed the agreement, EU Council President Herman Van Rompuy said, overcoming a last minute snag over Britain’s rebate, which will remain intact. The European Parliament must approve the deal next month so the new budget can take effect next January.

The banking resolution agreement designed to shield European taxpayers from having to foot the bill for rescuing troubled banks will be implemented on a national basis from 2018.

It lays the ground for a single system to resolve failed banks in the euro zone and the 27-nation EU, the second stage of what policymakers call a European banking union, meant to strengthen supervision and stability of the financial sector.”

“Most of Europe has been either in recession or on the brink for the past three years, while unemployment has steadily risen. EU unemployment now stands at 11 percent, the highest since records began, with youth unemployment a particular problem, especially in Spain, Greece, Italy, Portugal and Cyprus.

The new EU fund will back a “youth employment initiative” that would offer people under 25 a promise of a job, training or apprenticeship within four months of leaving education or becoming unemployed.

Politicians and sociologists are worried that extended unemployment for young Europeans will lead to a “lost generation” that never gets fully incorporated into economic life, with deep psychological and financial implications.”

NYT

“The European Union may soon have a new budget — including the first cut to spending in its history — after a surprise breakthrough deal on Thursday.”

“The budget still needs final approval by the European Parliament, but that is looking more likely thanks to this agreement. The European Parliament president, Martin Schulz, called the deal “acceptable” and said he was optimistic that he would have a majority of Parliament members backing it at a vote next week.”

“Separate from national spending, the budget is designed in part to balance out the economic development of its members by giving funding to poorer countries. The European Union has funded thousands of infrastructure and capital projects over the years, from the installation of broadband networks to the upgrade of road networks.

The budget also includes items meant to generate economic growth, like research and development and a new, more accurate satellite navigation system. It also funds regulation and administration in such areas as mergers and competition, the review of national budgets to ensure they do not include excessive deficits, and banking supervision.

If the European Union fails to get a seven-year deal passed by Parliament before the end of the year, the bloc would have to revert to annual budgets, which would make long-term planning difficult.”

It seems as if the leaders of the European Union–much of which has been mired by historically high unemployment and stagnant growth / recession since 2008–are finally realizing that greater fiscal coordination is needed in order to sustain the Monetary Union.

While it is true that the 7 year, 960 billion euro budget proposal represents an austerity program, in reality coming to an agreement creates the certainty and stability needed for businesses to make long term decisions (and thereby stimulating the economy more as opposed to hoarding cash for instance). It also allows for targeted long term spending, as opposed to a year-by-year budget which would complicate meaningful long-term investments in human and physical capital.

By concentrating on lower income European countries, the European Union will be picking the “low hanging fruit”, realizing a greater return on investment as these countries grow at faster rates. As these countries fully modernize, social spending will go down and new markets will open up, stimulating aggregate demand in the European Union as a whole.

In countries where such “low hanging fruit” does not exist, more specialized growth-targeting projects will help Europe’s higher income countries stay competitive in cutting edge fields going forward.

The plan also sets aside funding for administrative expenses, which will be important in ensuring compliance and accountability from the financial industries / MNCs (which is itself an important aspect in correcting Europe’s fiscal outlook). Managing too-big-too-fail financial institutions and tax evasions / illicit financial flows will be the two most important regulatory steps the EU can take to hold the ultra-wealthy accountable for their role in the current economic crisis and help prevent future crises.

Targeting youth unemployment has particularly significant implications for sustainable growth in Europe. While it is true $ 6 billion is not a lot of money, I believe that this small “drop in the bucket” can have a large impact. The reason for this optimism is the ability to augment public spending through “public-private partnerships” (PPP).

Public-private partnerships are particularly suited for targeting youth unemployment. The private sector is uniquely positioned to give insight into exactly what skills young people will need for the jobs of today and tomorrow. The government is uniquely positioned to implement these programs into school curricula and unemployment conditions–targeting non-workers with skills needed to obtain jobs. The question is how much money can $6 billion in public investment leverage in private investment?

While there is no exact formula, at the ECOSOC Partnerships forum this past April, Mr. Chirstian Friis Bach, the Minister for Economic Development Coordination in Denmark, told the audience (including myself) how he was able to leverage over 500 million euros in private money from 40 million euros in public investment for various sustainable development initiatives. While the scale is not the same (40 million v. 6 billion initial public investment), this still suggests that leveraging a few hundred to a thousand percent in private funding is not an unrealistic expectation–especially considering the importance of Europe’s youth as a future employment pool / consumption engine, and evidence of large cash reserves held by MNCs.

As the yearly ECOSOC forum in Geneva kicks off July 1st, a golden opportunity presents itself to frame this youth-employment initiative as a large scale public-private partnership. If that $6 billion turns into $60 billion, suddenly that “drop in the ocean” represents a much more meaningful investment.

There is also the importance of proving to employers that the youth is ready and able to work. Employers may believe young people are unemployed because they are lazy or incompetent, leading to the passing over of an otherwise qualified younger person for an older more experienced worker–youth uneployment becomes a self-fulfilling prophecy. If the youth employment program can show that young people indeed posses the skills, passion, energy and innovative ideas needed to be productive workers, then young people will be able to shed the negative stigmas associated with unemployment.

As youth salaries and consumption increase aggregate demand, businesses will have to expand to meet that demand, creating even more jobs which would be more likely to be filled by younger candidates (an example of how the fiscal multiplier is currently >1, as public investment will not crowd out private investment but rather they are be mutually reinforcing).

The Great Recession has turned into a full blown economic Depression throughout much of Europe. To address this, fewer public funds must be channeled in a more concentrated way and supplemented by private funds. Governments bailed-out large private sector actors in the wake of the Great Recession because they understood the interdependence of people, government and the private sector. Now it is time for the private sector to return the favor by augmenting sustainable development initiatives.

To be clear, PPPs are not a call for charity–they represent mutually beneficial and sustainable economic arrangements. Businesses need future employees and customers, governments need non-dependent tax payers, and young people need jobs.