Normative Narratives


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


Negative Externality

Original article:

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

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

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

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

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

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

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

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

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

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

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


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

Original article:

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

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

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

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

Supply and Demand Side Impediments to Education:

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

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

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

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

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

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

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

The Role of Good Governance:

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

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

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

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

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

 


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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: Public-Private Partnerships, for Better or for Worse

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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Transparency Report: Thailand’s Anti-Democracy Protests

Original article:

In a world now accustomed to democratic upheavals, including the Arab Spring and the Saffron and Orange Revolutions, the weeks of political upheaval in Thailand stand out for one main peculiarity. Protesters massing on the streets here are demanding less democracy, not more.

From their stage beneath the Democracy Monument, a Bangkok landmark, protesters cheer their campaign to replace Parliament with a “people’s council” in which members are selected from various professions rather than elected by voters.

The embattled prime minister, Yingluck Shinawatra, has proposed new elections as a solution to the turmoil. But that is just what the protesters do not want.

In today’s fractured Thailand, a majority wants more democracy, but a minority, including many rich and powerful people, is petrified by the thought of it.

Because a number of the protest leaders are members of Thailand’s wealthiest families, some have described the demonstrations here as the antithesis of the Occupy Wall Street movement. This is the 1 percent rebelling against the 99 percent, they say.

The reality is more complicated — the protesters include rich and poor, Bangkok residents and many people from southern Thailand who feel disenfranchised by the current government and its northern power base. What unites the protesters is the desire to dismantle Ms. Yingluck’s Pheu Thai Party, which has won every election since 2001.

The anti-democracy protests, which have been some of the largest in Thai history, call into question the commonly held belief that a rising tide of wealth in a society will naturally be followed by greater demands for democracy. Thailand today is much richer than it was two decades ago, but it is also much more divided.

On the face of it, the crux of the protest appears to be a classic power struggle between a dominant majority and a minority frustrated by its losing streak in elections and its inability to influence national policies in a winner-takes-all, highly centralized system.

But Thailand’s crisis is multifaceted and tightly intertwined with the fact that King Bhumibol Adulyadej, the country’s 86-year-old monarch, who during more than six decades on the throne has been revered to the point of quasi-religious devotion, is ailing and that the country is bracing for his death.

More broadly, Somsak Jeamteerasakul, a leading Thai scholar on the monarchy, argues that Thailand’s protracted political turmoil has been exacerbated by the contrast between a deified king and politicians who appear crass and venal in contrast. “We have an image of monarchy that is flawlessly excellent in everything,” he said in 2010. “If we had not built this image in the first place, we would not have so many problems and complaints with politicians.

Respect for the king, and the notion of his near-infallibility and beneficence, are deeply ingrained in Thais from the earliest years of schooling.

This blog is concerning the legitimacy of protests calling for replacing the democratically elected government with an appointed “peoples council”. There are two central tenets of liberal democracy I will base this analysis on:

1) Liberal democracy is meant to uphold the will of the majority, while protecting the rights of the minority.

2) Everyone is viewed as equal in the eyes of the government; no one person has more or less influence over political outcomes than another.

Based on uncontested election results, and the fact that protesters are not satisfied with the proposition of early elections offered by Prime Minister Yingluck Shinawatra, one can assume the protesters represent a minority of Thailand’s population. Based on this article, there is no evidence that the rights of this minority are being infringed upon.

Protesters cannot claim a mismanagement of the economy, as the per capita GNI has more than doubled over the past decade. Thailand’s HDI has been trending upwards for decades, and it’s poverty rates have been going down for years (accompanied by a decline in the Gini inequality index)–the current democratic governance structure surely has some merits.  One particular area of concern is Thailand’s level of perceived corruption / lack of transparency, however a move away from democracy would likely exacerbate this problem.

It seems rather that protesters, unhappy with populist policies that do not directly benefit them, are trying to change the policy making process to one which they can control. Such a move would be a violation of the two tenets of liberal democracy listed above. It would amount to upholding the will of the minority while violating the political rights of the majority. It would also give more power to the desires of select individuals.

To appease the opposition, the government should consider changing its parliament from a “first past the poll” system to a proportional representation system, to ensure a plurality of opinions in policy making. The government should also consider expanding civilian oversight mechanisms, to increase transparency and allay fears of corruption / embezzlement.

To become a more effective political party, the opposition should consider embracing policies which have had success in reducing poverty / inequality while simultaneously increasing economic growth. Such pragmatism is a necessary component for the continued relevance of any political party; in democracies everywhere, parties which do not embrace popular and effective policies tend to fall by the wayside.  

So far, the King and the military have stayed out of this fight, hopefully they will continue to do so and allow the democratic process to fix the unrest it has caused. Thailand should not dismantle its democratic system, which has a long history of effective governance.

 


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The Pope’s Quandary: Contraception and Poverty

To much fanfare, last week Pope Francis denounced the economic system which he believes perpetuates inequality and extreme poverty. Hopes are high that this progressive Pope can use his influential post to reform the Catholic Church. Already, Francis has gone on record saying that the church is “too obsessed” with birth control, abortion, and gay marriage:

“It is not necessary to talk about these issues all the time,” Pope Francis told an Italian outlet. “The dogmatic and moral teachings of the church are not all equivalent.”

In the new interview, Francis pointed out that the Church should be “a home for all, not a small chapel that can hold only a small group of selected people.”

However, saying it is “not necessary to talk about these issues all the time” is a bit of a cop-out, especially given overwhelming evidence that increased access to contraception can reduce poverty:

Some family planning proponents emphasize health and longevity benefits; others talk of human rights.

In the mix of available arguments, Population Action International has been focusing on the promise of economic prosperity. The organization advocates for women and families to have access to contraception in order to improve their health, reduce poverty and protect their environment.

“Right now, 222 million women, or 1-in-4 women of reproductive age, in the developing world do not want to become pregnant but need modern contraception,” said Dilly Severin, director of communications at the group, known as PAI. The organization “has a history of highlighting the common sense connections between fulfilling a woman’s right to contraception and the health, economic and other benefits that flow from it.” 

African political and cultural leaders made statements about the importance of youth to the demographic dividend, the economic growth that may result from changes in a country’s age structure, Weinstein-Levey said.

“They recognized that investing in youth’s sexual reproductive health and rights is critical to helping young people and to helping African economies reach their full potential. Many of these nations are on track to achieve the demographic dividend, but could significantly expedite progress with the boost of family planning,” she said.

Mothers and infants in sub-Saharan Africa face the greatest risks, according to Save the Children’s annual State of World’s Mothers report 2013, which assesses the well-being of mothers and children in 176 countries. The bottom 10 countries on the Mothers’ Index are all in sub-Saharan Africa, with infants in Somalia having the highest risk globally of dying on their birth day. First-day death rates are almost as high in the Democratic Republic of Congo, Mali and Sierra Leone. Meanwhile, mothers in Somalia and Sierra Leone face the second and third highest lifetime risk of maternal death in the world, respectively.

Surely, reducing infant and/or maternal mortality are at least as important in “protecting the sanctity of life” as contraception / abortion are…

The “common sense” benefits between fulfilling a women’s reproductive rights and poverty reduction are not new or novel–they are generally accepted in development economics. What is new / novel is a Pope who puts poverty alleviation above opulence, and human rights above religious dogma.

The Bible say’s “judge not lest ye be judged”. Pope Francis seems to be an accountable man; he has judged the global financial system, now he should judge the Catholic Church. It is hypocritical to blame the global economic system for perpetuating inequality, while ignoring the role his organization plays in allowing poverty to persist in the developing world.

Furthermore, while the Pope (and indeed any individual) has a very limited ability to affect the entire global economic system, it is very much within the Pope’s ability to shape the thinking and policies of the Catholic Church.  

It appears Pope Francis “practices what he preaches”, by living a humble life and even sneaking out at night to help the poor. I am not Catholic or even religious, but I support the stances Pope’s Francis has taken thus-far. However, instead of just finger-pointing, there are steps he can take that would allow the Catholic Church to take the lead in the battle against extreme poverty. 

 


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Economic Outlook: When Gauging Support for Raising the Minimum Wage, Poll its Biggest Opponents

Trend: Minimum Wage -- Real and Nominal Value, 1938-2013

There has been a strong push this holiday season (really dating much farther back) by a variety of labor groups seeking higher minimum wages. Specifically, Walmart employees, Fast-Food Workers, and most recently low-level financial sector employees have taken to the streets to make their demands for “livable wages” heard.

As one who believes in the positive externalities of a more egalitarian society, as well as a proponent of collective action, I am happy to see people using the tools at their disposal to overcome power-asymmetries that have persisted for decades. It would appear that I am not alone in this sentiment–according to Gallup polling, 76% of Americans support raising the minimum wage to $9/hr (69% support raising the minimum wage to $9/hr and indexing the minimum wage to cost of living increases).

Furthermore, the main fear associated with raising minimum wages–that it will lead to higher unemployment–has been debunked:

The idea of fairness has been at the heart of wage standards since their inception. This is evident in the very name of the legislation that established the minimum wage in 1938, the Fair Labor Standards Act. When Roosevelt sent the bill to Congress, he sent along a message declaring that America should be able to provide its working men and women “a fair day’s pay for a fair day’s work.” And he tapped into a popular sentiment years earlier when he declared, “No business which depends for existence on paying less than living wages to its workers has any right to continue in this country.”

Support for increasing the minimum wage stretches across the political spectrum. As Larry M. Bartels, a political scientist at Vanderbilt, shows in his book “Unequal Democracy,” support in surveys for increasing the minimum wage averaged between 60 and 70 percent between 1965 and 1975. As the minimum wage eroded relative to other wages and the cost of living, and inequality soared, Mr. Bartels found that the level of support rose to about 80 percent. He also demonstrates that reminding the respondents about possible negative consequences like job losses or price increases does not substantially diminish their support.

It is therefore not a surprise that when they have been given a choice, voters in red and blue states alike have consistently supported, by wide margins, initiatives to raise the minimum wage. In 2004, 71 percent of Florida voters opted to raise and inflation-index the minimum wage, which today stands at $7.79 per hour. That same year, 68 percent of Nevadans voted to raise and index their minimum wage, which is now $8.25 for employees without health benefits. Since 1998, 10 states have put minimum wage increases on the ballot; voters have approved them every time. But the popularity of minimum wages has not translated into legislative success on the federal level. Interest group pressure — especially from the restaurant lobby — has been one factor.

The social benefits of minimum wages from reduced inequality have to be weighed against possible costs. When it comes to minimum wages, the primary concern is about jobs. The worry comes from basic supply and demand: When labor is made more costly, employers will hire less of it. It’s a valid concern, but what does the evidence show?

For the evidence, lets turn to Dr. Krugman, who succinctly explains the evidence against this valid concern, and how “good” this evidence is:

Still, even if international competition isn’t an issue, can we really help workers simply by legislating a higher wage? Doesn’t that violate the law of supply and demand? Won’t the market gods smite us with their invisible hand? The answer is that we have a lot of evidence on what happens when you raise the minimum wage. And the evidence is overwhelmingly positive: hiking the minimum wage has little or no adverse effect on employment, while significantly increasing workers’ earnings.

It’s important to understand how good this evidence is. Normally, economic analysis is handicapped by the absence of controlled experiments. For example, we can look at what happened to the U.S. economy after the Obama stimulus went into effect, but we can’t observe an alternative universe in which there was no stimulus, and compare the results.

When it comes to the minimum wage, however, we have a number of cases in which a state raised its own minimum wage while a neighboring state did not. If there were anything to the notion that minimum wage increases have big negative effects on employment, that result should show up in state-to-state comparisons. It doesn’t.

So a minimum-wage increase would help low-paid workers, with few adverse side effects.

But what do these “egg-heads”, in their “ivory-towers” know? They are out of touch with the real world! The person who suffers from minimum wage increases is not the academic, or even the large corporation. It is the small business owner who suffers–Mom and Pop! Well, Gallup polled small business owners on their thoughts of minimum wage increases, and responses were not as overwhelmingly negative as one would think:

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They were also polled on the effects of a minimum wage increase on how they invest back into their business:

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The majority of small business owners responded they would not reduce their current workforce (64%) or reduce worker benefits (60%) if the minimum wage was increased. The largest negative effect would be a reduction in capital spending (38%). However, in the context of a divergence of worker compensation from productivity, and a declining share of income going to labor (in favor of capital), perhaps such a re-balancing is not such a bad thing.

Small business owners are not thrilled about the prospect of a minimum wage increase–they are not expected to be. However, the fact that nearly half support raising the minimum wage says something about small business owners.

Perhaps they recognize peoples purchasing power is tied to their wages, so increasing wages will eventually lead to higher sales (especially considering minimum wage employees have a much higher marginal propensity to consume than wealthier people). Or perhaps these people are simply more in touch with what happens in the communities they live in than their big-business contemporaries. They know people living on the minimum wage aren’t lazy people waiting for a government handout; they are their friends, family, and customers. Perhaps they believe that more egalitarian communities are friendlier, safer places, and are willing to pay a little extra in order to achieve that goal. 

Increasing the minimum wage is overwhelmingly popular, and more popular among small business owners than one would expect. Furthermore, it would save billions of dollars in Welfare programs by ending an implicit subsidy for businesses who pay non-livable wages and stimulate the economy by redistributing income to people who are more likely to spend it.

The time to act has come; people are literally taking to the streets. It is also important to index the minimum wage to cost of living increases, so we do not experience the declining real minimum wage we have had for the past 4 decades. Indexing also avoids a political battle every-time the cost of living changes (which it constantly does).

I for one am interested and excited to see the myriad benefits that decreasing poverty rates and reversing the trend of increasing income inequality have on American society as a whole.


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Transparency Report: America The Post-Racial? Not So Fast…

While there is no single definition of a post-racial society, I like the definition offered on Wikipedia:

Post-racial America is a theoretical environment where the United States is devoid of racial preference, discrimination, and prejudice.

Having defined what a post-racial American society entails, the next natural question would be “have we achieved this normative goal ?” Despite anecdotal evidence (Barack Obama was elected and re-elected as our President!), I would argue that America is not yet a post-racial society. It is important to make this distinction, as prematurely declaring “mission accomplished” ultimately makes accomplishing this goal all the more difficult.

Two specific issues–minority voting rights and school desegregation–highlight that work still remains to be done when it comes to achieving a post-racial society. Recent Supreme court decisions would make it seem that racial bias is no longer an issue in America; experiences in everyday life suggest otherwise.

Voting Rights:

During the 2011 legislative sessions, states across the country passed measures to make it harder for Americans – particularly African-Americans, the elderly, students and people with disabilities – to exercise their fundamental right to cast a ballot. Over thirty states considered laws that would require voters to present government-issued photo ID in order to vote. Studies suggest that up to 11 percent of American citizens lack such ID, and would be required to navigate the administrative burdens to obtain it or forego the right to vote entirely.

Despite this frenzy of state legislation to counteract so-called voter fraud and to protect the integrity of our elections, proponents of such voter suppression legislation have failed to show that voter fraud is a problem anywhere in the country. Aside from the occasional unproven anecdote or baseless allegation, supporters of these laws simply cannot show that there is any need for them. Indeed, despite the Department of Justice’s 2002 “Ballot Access and Voting Integrity Initiative” promising to vigorously prosecute allegations of voter fraud, the federal government obtained only 26 convictions or guilty pleas for fraud between 2002 and 2005. And other studies of voter fraud consistently find that it is exceedingly rare – a 2007 Demos study concluded that “voter fraud appears to be very rare” and a 2007 study by the Brennan Center found that “by any measure, voter fraud is extraordinarily rare.” The Voting Rights Project will continue to fight these laws that disenfranchise millions of eligible voters without any legitimate justification.

Despite evidence of voter discrimination based on race as recently as the 2012 Presidential Election, a Supreme Court ruling this June essentially removed federal oversight over state and local voting laws (which is the level at which all elections are held):    

The decision in Shelby County v. Holder revolves around Section 4 of the Voting Rights Act, which establishes a “coverage formula” to determine which states and local governments fall under Section 5, and therefore need to get approval before changing their voting laws. The justices ruled that Section 4 is unconstitutional, and that the formula used for decades — revised and extended several times by Congress — can no longer be used to establish those “preclearance” requirements: “The conditions that originally justified these measures no longer characterize voting in the covered jurisdictions.” 

Supreme Court Justice Ginsburg’s dissenting opinion on the ruling highlights the need to restore Section 4 and the potential dangers of prematurely gutting the Voting Rights Act:

With overwhelming support in both Houses, Congress concluded that, for two prime reasons, §5 should continue in force, unabated. First, continuance would facilitate completion of the impressive gains thus far made; and second, continuance would guard against back­-sliding. Those assessments were well within Congress’ province to make and should elicit this Court’s unstinting approbation.

School Desegregation:

African-American and Latino students are less likely to attend racially and ethnically diverse schools today than at any other time in the last four decades. This, almost 60 years after the landmark Supreme Court ruling that desegregated schools, represents a major setback for one of the core goals of the civil rights movement.

“Our school district is extremely segregated,” said Caitlin McNulty, an English-as-a-second-language teacher at Valley West Elementary School in Houston. “Part of that is just we have a huge minority population in our district, period, so I’d say the majority of our schools are at least 80 percent minority.”

In her school district, African-Americans and Latinos made up more than 90 percent of the student population last year. Only seven of the 705 students at her school were white — less than one percent.

“That’s not out of the ordinary” in her district, McNulty said. “It’s just not representative of the population that’s here.”

In the 1971 case Swann v. Charlotte-Mecklenburg Board of Education, the Supreme Court ruled unanimously that public school districts could pursue desegregation by busing students from highly segregated neighborhoods into majority-white schools. The goal was for schools to be “racially balanced” and be compliant with the 1954 Brown v. Board of Education decision.

But in 1991, the Oklahoma City v. Dowell case ended a federal order to desegregate Oklahoma schools, opening the door for numerous court cases that have rolled back desegregation efforts across the country. The court ruled that as long as school districts made a “good faith” attempt to remedy past segregation, they would no longer have to try to integrate public schools.

Commenting on the findings of the Civil Rights Project’s study, the University of South Carolina School of Law’s Derek Black said that “integration steadily increased in our public schools from the late 1960s well into the 1980s and fundamentally enhanced the quality of education received by students of all races. But through a combination of willful, blind and benign neglect, nearly all of those gains have been lost.”

In Texas and other states experiencing resegregation of their schools, students now often grow up interacting only with other students who look like them.

Some may say “so what? whats the big deal? overt racism is no longer a problem in America and beyond that a persons racial biases (or lack-thereof) is their personal choice” However, racial bias in voting rights and school segregation have implications beyond just educational attainment and electoral outcomes. Both of these variables shape the enabling environment for a more racially inclusive and egalitarian society.

Voting rights are important because, based on who is elected to office, different policies will be enacted. By depressing minorities abilities to choose their elected officials, a snowball effect begins, with the end result being that the concerns of these marginalized groups are not addressed by our politicians. Inequalities increase and social exclusion persists. Minorities do not have the right to unilaterally determine who is elected / what policies they pass. However, they should have the same rights of every other citizen in affecting the outcomes of elections.

School re-segregation has an inter-generational effect on racial equality. When students go to desegregated schools, they interact with children who come from different racial and socioeconomic backgrounds. These experiences, particularly early in life, go a long way towards shaping peoples attitudes towards race and can help break damaging stereotypes. Every future leader of America will go through school, who they go to school with could very well affect their future policy decisions.

There is also the idea that “separate but equal” is never truly equal. If minority students are systematically herded into sub-par schools, they will go on to get worse jobs and racial inequality will increase in the future. American concepts of “equality of opportunity” and “meritocracy” are at stake; recent evidence suggests that inequality and social immobility have been trending upwards unchecked for decades.      

It is nice to dream of a post-racial America–it is a normative vision I surely share with millions of other Americans. However, simply saying “race is no longer an issue” does not make it so. This premature declaration will reverse recent gains made in racial equality and depresses the future prospects of minorities, threatening the “American Dream” itself. Political will is needed to counter inequality of opportunity in America, and it is clear that race must still be a consideration when harnessing this political will into public policy.


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Economic Outlook: “Financialization”, “Commoditization” and the Real Economy

In a recent Economix blog, Bruce Bartlett explores the role “financialization” has played in American (and global) economic stagnation:

“Economists are still searching for answers to the slow growth of the United States economy. Some are now focusing on the issue of “financialization,” the growth of the financial sector as a share of gross domestic product.”

“According to a new article in the Journal of Economic Perspectives by the Harvard Business School professors Robin Greenwood and David Scharfstein, financial services rose as a share of G.D.P. to 8.3 percent in 2006 from 2.8 percent in 1950 and 4.9 percent in 1980. The following table is taken from their article.”

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.

They cite research by Thomas Philippon of New York University and Ariell Reshef of the University of Virginia that compensation in the financial services industry was comparable to that in other industries until 1980. But since then, it has increased sharply and those working in financial services now make 70 percent more on average.”

“While all economists agree that the financial sector contributes significantly to economic growth, some now question whether that is still the case. According to Stephen G. Cecchetti and Enisse Kharroubi of the Bank for International Settlements, the impact of finance on economic growth is very positive in the early stages of development. But beyond a certain point it becomes negative, because the financial sector competes with other sectors for scarce resources.”

“Ozgur Orhangazi of Roosevelt University has found that investment in the real sector of the economy falls when financialization rises. Moreover, rising fees paid by nonfinancial corporations to financial markets have reduced internal funds available for investment, shortened their planning horizon and increased uncertainty.”

“Adair Turner, formerly Britain’s top financial regulator, has said, “There is no clear evidence that the growth in the scale and complexity of the financial system in the rich developed world over the last 20 to 30 years has driven increased growth or stability.”

He suggests, rather, that the financial sector’s gains have been more in the form of economic rents — basically something for nothing — than the return to greater economic value.

Another way that the financial sector leeches growth from other sectors is by attracting a rising share of the nation’s “best and brightest” workers, depriving other sectors like manufacturing of their skills.”

“The rising share of income going to financial assets also contributes to labor’s falling share. As illustrated in the following chart from the Federal Reserve Bank of St. Louis, that share has fallen 12 percentage points since its recent peak in early 2001 and even more from its historical level from the 1950s through the 1970s.

Labor Share of Nonfarm Business Sector

Bureau of Labor Statistics, Department of Labor

The falling labor share results from various factors, including globalization, technology and institutional factors like declining unionization. But according to a new report from the International Labor Organization, a United Nations agency, financialization is by far the largest contributor in developed economies (see Page 52).

The report estimates that 46 percent of labor’s falling share resulted from financialization, 19 percent from globalization, 10 percent from technological change and 25 percent from institutional factors.

This phenomenon is a major cause of rising income inequality, which itself is an important reason for inadequate growth. As the entrepreneur Nick Hanauer pointed out at a Senate Banking, Housing and Urban Affairs Committee hearing on June 6, the income of the middle class is critical to economic growth because of its buying power. Mr. Hanauer believes consumption is really what drives growth; business people like him invest and create jobs to take advantage of middle-class demands for goods and services, which must be supported by good-paying jobs and rising incomes.”

“According to research by the economists Jon Bakija, Adam Cole and Bradley T. Heim, financialization is a principal driver of the rising share of income going to the ultrawealthy – the top 0.1 percent of the income distribution.”

“Among those pointing their fingers at financialization is David Stockman, former director of the Office of Management and Budget, who followed his government service with a long career in finance at Salomon Brothers and elsewhere. Writing in The New York Times, he recently said financialization was “corrosive” and had turned the economy into “a giant casino” where banks skim an oversize share of profits.

It’s not yet clear what public policies are appropriate to deal with the phenomenon of financialization. The important thing at this point is to be aware of it, which does not yet appear to be the case in Washington.”

A complementary practice that has accompanied “financialization” is the practice of “commoditization“:

“Commoditization” has led to food price volatility and food insecurity in the developing world. It also perpetuated the housing bubble–while it is true that mortgages were always financial products, the way the mortgage backed securities grouped mortgages together turned a practice that was once a means of saving into an opportunity for people to use the equity in their homes like credit cards. When the housing bubble burst, many people found their mortgages “under water”. While there is certainly an element of personal responsibility, the scope of the housing crisis was certainly deepened due to “financialization” and “commoditization”.

Financialization attracts the best and brightest away from other non-financial fields. When all these talented people are working in a saturated market (such as more traditional investments), a natural effect will be the creation of “innovative” financial products–“commoditization”. While commoditization creates short run value by making products more liquid, in the long run it leads to price volatility and bubbles. 

Financialization has led to greater income inequality (as the vast majority of capital gains go to the ultra-wealthy), and diverts resources and man-power away from non-financial industries (the “real economy) due to higher fees paid to financial services (these resources could go to, say, MORE HIRING). It has also perpetuated destabilizing, high-speed, arbitrage-seeking investment. 

It is interesting that Mr. Bartlett says that it is unclear what public policies should be used to correct for this misalignment of resources. The answers are there (and Bruce himself has mentioned some in previous posts), the problem is implementation, as the proper policy responses require transparency and international cooperation and coordination (due to the global nature of capital in the digital age in order to prevent “capital flight”). Therefore, these commitments are rife with incentives to cheat (“prisoner’s dilemma”) which makes it much harder to come to binding agreements. 

One appropriate response is a financial transaction tax (FTT). Such a tax would deter short-run destabilizing trades that have accompanied “financialization” and “commoditization” and direct investments into more long-run wealth creating endeavors (think venture capitalism as opposed to high-speed trading). This would also temper the price volatility effect of “commoditization”.

Another appropriate response would be to have a global standard tax rate for short-run capital gains. By setting such a rate higher than regular income taxation, resources would be diverted away the financial sector and back into the real sector (are you seeing a theme here?). Financial bubbles would be less prevalent, as people would be more likely to hold their income in safer assets / reinvest it in non-financial assets. Due to the relative ease of making short-term capital gains, and differences in national income tax rates, a global short-term capital gains tax rate of 50% seems like a good baseline to start from. Long-term capital gains should be taxed like ordinary income, not at lower preferential rates.

“Financialization” and “commoditization” have had adverse effects on our real economy. The brightest people and an increasing share of national output have been diverted towards (generally) unproductive activities  In the short run this leads to economic growth. But this growth in unsustainable; in the long run crises occur when these bubbles burst, which  have adverse effects that  reach far beyond the financial sector (due in part to “commoditization”). 

Because public policies have allowed financial institutions to grow so powerful, the were able to become “too big to fail“, necessitating tax-payer backed bailouts.

It is a good sign that economists are scrutinizing these practices. If it can be proved that not only do these practices lead to crises, but also have adverse effects on growth, employment, consumption and equality during “good” times, then it will be much harder for politicians around the world to resist the call for greater financial industry accountability via higher taxation (despite the threats from vested interests; if global standards are established, the 0.1% are welcome to setup the Mars Stock Exchange is they so desire).


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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