Normative Narratives


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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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Transparency Report: You’ve Gotta Fight, For Your (Human) Rights

This past week marked the well documented 50th anniversary of Dr. Martin Luther King’s March on Washington For Jobs and Freedom and the “I Have a Dream” speech. Despite being known as a civil rights leader, Dr. King was irrefutably a human rights activist. Human rights include the economic and civil rights, as well as social, political, and cultural rights. Human rights, Dr. King realized, we indivisible, interdependent,non-excludable / universal (human rights are for all people, and are rooted in our common humanity) and mutually reinforcing; upholding certain rights (for example freedom of assembly, speech, political rights, the right to employment, access to information) empowers people to claim other rights, while one human rights violation tends to beget others (culminating in a life of poverty and social exclusion). Today, these concepts are largely accepted by the international community and domestic development organizations–in Dr. King’s time they were pioneering concepts. Dr. King understood the difficulty of claiming rights, which involves mobilizing an oppressed group to overcome vested interests, power asymmetries, and collective action problems which sustain these human rights violations.

Furthermore, Dr. King understood the role an accountable and effective democratic government plays in upholding human rights obligations–as evidenced by the location of this historic rally. An effective democracy creates an enabling environment for people to claim their rights, which is one of the main reasons that democracy and human rights are so closely related. However, this enabling environment is only the beginning of the determination and thick-skin needed to make meaningful advances in human rights.

There is no doubt in my mind that, had Dr. King not been assassinated, he would have continued his work both for civil rights specifically and human rights more generally. Dr. King would have undoubtedly endorsed UN Human Rights Treaties enshrining the rights to development and employment, as well as other economic, social, cultural, civil and political rights. As a man, Dr. King died to young; as a symbol he will live forever–I hope in some small way I am helping to further the work of this great American hero.

I would like use this blog as anopportunity to reflect on two themes I have noticed in my time as a student of the political economy of development, as a human rights worker for the UNDP, and as a generally informed global citizen:

1) You’ve got to fight for your rights:

A play on a popular Beastie Boys Song, but the message is 100% true. When I think of advances in human rights in America (the civil rights movement, the women’s suffrage movement, the gay rights movement), they all have in common a struggle to mobilize people to claim their rights. Furthermore, sacrifices must be made–Dr. King made the ultimate sacrifice for his cause. Progress will not be linear or fast, but through hard work over time meaningful progress can be made.

2) The dehumanization of minorities:

We live in the “age of human rights”. A quick historic overview: the concept of human rights in international governance and development took root in the aftermath of WWII. However, it was not until the end of the Cold War that the opportunity to champion human rights globally presented itself. Since that point, the UN and other similar government and non-governmental organizations have taken up this call. This summer, as an intern with the UNDP democratic governance group’s human rights team, I had the opportunity to participate in an event commemorating the 20th anniversary of the Vienna Declaration and
Programme of Action
, which commemorated advances in human rights and mapped out future opportunities in human rights advocacy.

This “age of human rights” does not mean that human rights violations no longer occur. If anything, advances in ICTs and social media have exposed the extent to which human rights violations take place, particularly in least developed / authoritarian countries. Here at NN, I have written extensively on how human rights violations are at the heart of the majority of armed conflicts today; it is worth mentioning that development goals are rarely sustained in a conflict-affected country.

In this day and age, human rights violators justify their actions by dehumanizing the people whose rights are being violated. In Egypt and Syria, opposition groups are deemed terrorists by those in power. Just as media independence is a feature of a pluralistic democratic society, controls on media outlets–combined with propaganda campaigns–aim to drive home dehumanization in order to justify virtually any human rights violation (including murder). Racism, stereotyping and scapegoating can reinforce dehumanization campaigns.

We see dehumanization take place most often in the name of religion or “traditional values”. Any governing document, be it the Constitution of the United States, the Koran, or the Bible, interpreted too strictly, can be used to justify human rights violations; extremists may argue that if you do not subscribe to their beliefs, then you are less than human and do not deserve basic rights.

Governing documents are meant to be living, amenable to the context of the times. They are amended and reinterpreted to reflect changing societal norms; religion tends to be less adaptive, perhaps explaining part of the decline in religious observance in America. Islam’s  inability to reinterpret itself for modern times is a root cause of Islamic extremism.

I too have a dream, or a normative vision, for the world. This vision depends on greater investments in human rights education and human capital at a young age, recognizing youth as an extremely important period of personal development. It depends on an understanding of the importance of sustainable human development and both domestic and extra-territorial human rights obligations. Sustainable human development cannot take place to the detriment of future generations or at the expense of the world’s most vulnerable people.

Anybody can do their part to help realize this normative vision; challenge anybody trying to sell a strict interpretation of any ideology and / or trying to dehumanize any group with stereotypes / racism. The vast (silent) majority of the global community wants peace and prosperity for all–together we can overcome this global collective action problem in the years and decades to come.


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Economic Outlook: Neo-Classical Economics, Perfect Competition, and the Cost(s) of Attending College

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Student loan debt in America is a controversial subject. Some countries subsidize higher education, the U.S. does not. In the context of the past decades in America, marked by increasing inequality and decreasing social mobility, the issue has become even more controversial. Yong adults, often without parental support, are sold the panacea of higher education as a means to a better future. While it is true that college graduates make more and experience lower unemployment rates, simply “getting a degree” can often be counter productive. If the degree is in a field with very limited job opportunities, or due to cyclical economic factors outside individual’s control (i.e. a prolonged recession), a young adult may be saddled with student loan debt; far from enabling social mobility, an ill planned college decision can leave a person with a lifetime of debt and actually push them into a “poverty-trap”. Further exacerbating the problem, the importance of a college degree has drastically increased the demand of a college education, pushing up the average cost of attending college.

In America, public student loan debt is somewhere between $900bn and $1 trillion dollars–most economists agree that student loan debt and poor job prospects have caused young adults to put off moving out, depressing overall consumption and further prolonging the (growth) recession. Against this backdrop, the Obama administration has attempted to stymie the rapidly increasing costs of college education. Obama’s plan is essentially two fold, 1) subsidize student loan debt with fixed preferential rates, and 2) rank institutions–based on tuition, graduation and retention rates, student makeup and graduates’ earnings–and then tie federal aid to those rankings.

The Obama administration has already passed a watered down version of its proposed student loan plan. The plan will tie rates to the government borrowing rate (T-bill) plus a premium depending on the level of the degree being pursued. While a short term fix while the economy stagnates, a capped rate of 8.25% does not provide the stability or low costs of fixed subsidized rates that many were hoping for. The Obama administration kicked the can down the road; how far down the road remains to be seen and is largely independent of the merits of a college education.  Hopefully this short-term fix remains a fix for a while, and only becomes an issue again in a less contentious economic and political climate.

The second part of Obama’s plan, revealed yesterday at the University of Buffalo, proposes to publish information to make the decision process more transparent for prospective college students. Ultimately, Obama wants to tie federal aid to these rankings, creating an incentive for schools to keep costs down. If this part of the plan does not pass through congress, at least the information campaign segment of the plan is isolated from political gridlock. Opponents of the plan say that and results based plan will compromise the integrity of a degree, causing schools to make graduation easier. I find it hard to believe that a school would give up quality control over its most valuable asset–a degree–simply for student loan money.

Opponents of both of these plans contend that the government should get out of the student aid business and allow market forces to determine the price of a college education / student loan. At the root of this argument is the belief of neo-classical economics that perfect competition produces optimal outcomes for consumers, producers, and society as a whole. However, empirical evidence suggests a different outcome–rising costs of a college education without a related increase in the benefits of that education (and arguably decreasing benefits, as an undergraduate college degree becomes more commonplace and therefore less of a differential in hiring decisions). How could this be? Have people been duped into believing college is more valuable than it really is? While poor decision making by borrowers and lenders has surely exacerbated the problem of student loan debt and college tuition increases, the real culprit is in the assumptions underlying neo-classical economics and perfect competition. While no market in the real world completely fits these assumptions, the markets for college education and student loans are particularly ill matched.

Neo-Classical Assumptions:

  1.  People have rational preferences among outcomes — This could not be further from the truth. I have never met someone who is 100% rational (think Spock from Star-Trek). Some people are mostly rational, but in general people tend to be very short-sighted with consumption and investment decisions (or lack-thereof)–particularly those at the bottom of society who have little reason to be optimistic about their futures;
  2.  Individuals maximize utility and firms maximize profits — Well it is certainly true that firms (in this case schools) move to maximize their profits. However, maximizing utility is more difficult to evaluate–everyone values things differently, has different discount rates for consuming now vs. saving for later, different values work vs. leisure time, etc. This assumption cannot be refuted, but really does not tell us much because of its ambiguity (peoples preferences are different and cannot be compared);
  3.  People act independently on the basis of full and relevant information — Far from full and relevant information, often times power and knowledge asymmetries lead to very poor decision making. The second part of Obama’s plan intends to overcome this information gap.


Perfect Competition:

Perfectly competitive markets exhibit the following characteristics:

  1. There is perfect knowledge, with no information failure or time lags.  Knowledge is freely available to all participants, which means that risk-taking is minimal and the role of the entrepreneur is limited. — The role of the entrepreneur (in this case the student) is not minimal. The availability of information and guidance can make the difference between a “good decision” (for example going to a public college for a STEM degree) vs. a “bad decision” (for example going to a private party school for a poetry degree). The time-lag is particularly pronounced in education decisions, college often requires a large upfront cost based on the belief that the net benefit (higher earnings – college costs – student loan fees – opportunity cost to attend college) will be positive. Even with perfect information today (which is very difficult to obtain) due to uncertainty about future borrowing costs (argument for fixing student loan rates) / job availability / degree obsolescence (the field advances or becomes irrelevant), the decision to attend college is largely a leap of faith–a leap that is continuing to fall short for many people (which is why college costs must be reigned in, to align the costs and benefits of a college education);
  2. There are no barriers to entry into or exit out of the market. — While there are no real explicit barriers to entry, the implicit barriers to entry are huge. Colleges require huge start-up costs, and take time in order to establish “prestige”. The best colleges have an implicit oligopoly (this is not necessarily a bad thing, but it should be noted); while they may partner with public institutions / community colleges, their demand for their services are rival, demand inelastic, and constantly in short supply. Public Colleges, technical schools, community colleges, and more recently online schools or “MOOCs” have become cheaper alternatives;
  3. Firms produce homogeneous, identical, units of output that are not branded. — Related to the previous point; while alternatives to “traditional schooling” are now available, they are generally not seen as comparable to University education (Public colleges are, but community colleges / MOOCs typically are not). Part of this has to do with the stigma attached to these alternative channels of education. Guidance counselors, college advisers, unemployment trainers  and even employers should all promote these differentiated services based on the needs and desires of potential applicants. Sometimes going to a technical college / pursuing an associates degree is more beneficial and (always) costs less than going to a traditional 4 year college–sometimes these options can be “stepping stones” to more advanced degrees as the young adult matures and reevaluates his/her priorities;
  4. Each unit of input, such as units of labour, are also homogeneous. — Each “input” is not homogenous–people go to college to explore their potential and study any number of diverse fields. Neither “inputs” nor “outputs” of colleges are in any way homogenous;
  5. No single firm can influence the market price, or market conditions. The single firm is said to be a price taker, taking its price from the whole industry. — No “market price” for colleges; inelastic demand, imperfect information and a shortage of spaces allow certain colleges to essentially charge whatever tuition rate they want;
  6. There are a very large numbers of firms in the market. — True, but this has not led to true competition due to increasing demand;
  7. There is no need for government regulation, except to make markets more competitive. — Well that’s the point…
  8. There are assumed to be no externalities, that is no external costs or benefits. — Certainly not true; there are undeniable positive externalities of college education for both individuals and society as a whole.
  9. Firms can only make normal profits in the long run, but they can make abnormal profits in the short run. — There is no end in sight to the rising cost of schooling without government intervention.

Empirical evidence and a baseline analysis of neo-liberal economics refutes the idea that the costs of college should be left for the markets to decide. One would hope our elected officials would be more educated on the subject, and could offer an alternative other than unfettered belief in the power of markets to produce optimal outcomes. Obama’s proposals seem to hit at the root causes of rising college costs; lets hope his plans are implemented. Even if they are not fully implemented, the short-term student loan rate fix and upcoming information campaign should provide temporary relief and begin reversing the trend of rising college costs.

Please do not get me wrong, I am a strong proponent of higher education. But it is no panacea and it can actually be counter productive if not addressed within a C-B framework. It is the job of the government to keep costs down (as self-regulation of college tuition simply does not exist), and subsidize college education (both loans and tuition) to reward the positive externalities of higher education. It is the job of people, aided by advisers, parents, and in the near future government collected data, to consider the benefits and costs of college, and make appropriate decisions for themselves. Underlying this C-B analysis should be fixed loan rates, otherwise a robust analysis is impossible.

Note: The inspiration for this blog is “Development Economic Through the Lens of Psychology” , an excellent journal article I highly suggest to my readers.


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Transparency Report: Prison Paradox Redux

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A few months back, I blogged about what I termed the “Prison Paradox“:

“The number of Americans in state and federal prisons has quintupled since 1980, and a major reason is that prisoners serve longer terms than before”

The shift to tougher penal policies three decades ago was originally credited with helping people in poor neighborhoods by reducing crime. But now that America’s incarceration rate has risen to be the world’s highest, many social scientists find the social benefits to be far outweighed by the costs to those communities.”

“‘Raymond V. Liedka, of Oakland University in Michigan, and colleagues have found that the crime-fighting effects of prison disappear once the incarceration rate gets too high. “If the buildup goes beyond a tipping point, then additional incarceration is not going to gain our society any reduction in crime, and may lead to increased crime,’ Dr. Liedka said.”

“‘Prison has become the new poverty trap,’ said Bruce Western, a Harvard sociologist. ‘It has become a routine event for poor African-American men and their families, creating an enduring disadvantage at the very bottom of American society.’

Long-term lockup rates, and poor job prospects for ex-cons, great a “prison culture” in poor neighborhoods. Older ex-con’s believe a return to jail is inevitable, young children believe jail is inevitable (because of what they have witnessed growing up); this pessimism leads to poor decision making and ultimately creates a self-fulfilling cycle of poor prospects, poor decision making, and subsequent prison terms (and perpetuates the inter-generational aspect of the poverty trap).

As the federal and state governments look for areas to make spending cuts, it would be beneficial for policymakers to revisit reducing prison sentences for certain crimes. It seems that shorter prison sentences would save money today via a lower prison bill, and save us money in the future in the form of lower future entitlement spending. Less spending on long prison terms and greater spending on social programs (which enhance ones future prospects and thus makes crime a less attractive alternative) should combine to break the “prison poverty trap”.

Evidence of a drop in U.S. prison population suggests that law-makers are beginning to take a more pragmatic approach towards punishing criminal activity:

“The prison population in the United States dropped in 2012 for the third consecutive year, according to federal statistics released on Thursday, in what criminal justice experts said was the biggest decline in the nation’s recent history, signaling a shift away from an almost four-decade policy of mass imprisonment.”

“The number of inmates in state and federal prisons decreased by 1.7 percent, to an estimated 1,571,013 in 2012 from 1,598,783 in 2011, according to figures released by the Bureau of Justice Statistics, an arm of the Justice Department. Although the percentage decline appeared small, the fact that it followed decreases in 2011 and 2010 offers persuasive evidence of what some experts say is a “sea change” in America’s approach to criminal punishment.”

“In recent years, tightened state budgets, plummeting crime rates, changes in sentencing laws and shifts in public opinion have combined to reverse the trend. Experts on prison policy said that the continuing decline appears to be more than a random fluctuation.”

“Most observers agree that the recession has played a role in shrinking prison populations.”

“Though the trend may have begun out of a need for belt-tightening, it had grown into a national effort to rethink who should go to prison and for how long”

Changes in state and federal sentencing laws for lower-level offenses like those involving drugs have played a central role in the shift, he and others said, with many states setting up diversion programs for offenders as an alternative to prison. And some states have softened their policies on parole, no longer automatically sending people back to prison for parole violations.”

“Changing public attitudes are also a major driver behind the declining prison numbers. Dropping crime rates over the last 20 years have reduced public fears and diminished the interest of politicians in running tough-on-crime campaigns. And public polls consistently show that Americans are now more interested in spending money on education and health care than on building more prisons.”

“A year or even two years is a blip and we shouldn’t jump to conclusions, but three years starts to look like a trend,” said Marc Mauer, executive director of the Sentencing Project, a nonprofit research group based in Washington. But he said that the rate of inmates incarcerated in the United States continued to be “dramatically higher” than in other countries and that the changes so far were “relatively modest compared to the scale of the problem.”

It should be emphasized that this is only the tip of the iceberg. But progress must start somewhere, and both empirical evidence and public opinion appear to have shifted the way that law-makers address criminal punishment.

Less money spent on prisons opens up fiscal space for crime prevention and deterrence programs.

Crime prevention programs hit on the root causes of criminal behavior– a combination of socio-economic realities and a criminal / prison culture that often makes a life of crime a self-fulfilling and then self-perpetuating reality. By investing more in schools, healthcare (including mental healthcare, which is unquestionably linked to anti-social and criminal behavior), and other social programs that promote meritocracy and social mobility, disenfranchised youths will have more reason to be optimistic and make long-term investments in themselves that reflect that optimism. By having less parents in jail and more at home, parental income and guidance can act as a substitute for gang affiliation and money from criminal activities.

Part of non-jail punishment for minor criminal activities should be education on the detrimental effects of crime on youth and society, so that those who are given a fresh chance pass on these lessons to a younger generation which looks up to them.

Crime deterrence involves education on the detrimental effects of crime on oneself and society (overlapping with crime prevention), and increased spending on police officers. Having more officers on the street makes crime a less appealing alternative (especially in an environment where alternatives actually exist), while also providing security for hard working innocent people (who ultimately pay not only for both operating prisons and police officers via taxation).

People need to be held responsible for their actions, but the punishment must fit the crime. Making an example of individuals in an attempt to deter future crime does not work. What it does is impose an unfair burden on both the tax-payer and creates a vicious cycle of socio-economic degeneration that disproportionately affects poor people and minorities.

Violent criminals and multiple offenders must be kept off the streets. But imposing long jail sentences on first-time-non-violent offenders and parole violators can be counter-productive, turning misguided individuals into career criminals.

In assessing the impacts of a more restrained and pragmatic approach to prison sentencing, we must wait for significant reductions in incarceration rates as well as a “time lag”, as human development is a dynamic process. For now, we can be optimistic that after decades of misguided policy, we seem to have hit a turning point.

“This is the beginning of the end of mass incarceration,” said Natasha Frost, associate dean of Northeastern University’s school of criminology and criminal justice.


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Economic Outlook: U.S. Senate Fails to Pass a Bill Preventing the Doubling of Student Loan Rates

The U.S. Senate on Thursday thwarted two rival bills aimed at stopping interest rates on millions of federal student loans doubling in less than a month.”

Student loan debt in America now surpasses $1 trillion, according to the U.S. Consumer Financial Protection Bureau, and is already hindering young people from making important economic decisions such as purchasing new homes or cars.

Last year lawmakers agreed to extend a previous rate-increase freeze on student loans for another year. Unless Congress comes to an alternative agreement, interest rates will double to 6.8 percent on July 1, adding an extra $1,000 to borrowers’ payments every year.”

“The Comprehensive Student Loan Protection Act, a bill introduced by Republican Senators Tom Coburn of Oklahoma, Richard Burr of North Carolina and Lamar Alexander of Tennessee, would have pegged the interest rates to the U.S. Treasury 10-year rate, plus 3 percentage points.

Democrats say that plan would only hurt borrowers by causing them to pay higher rates in the future as the economy recovers and interest rates climb.”

“The Democrat bill introduced by Tom Harkin of Iowa, Jack Reed of Rhode Island, and Majority Leader Harry Reid of Nevada would have frozen interest rates on subsidized Stafford student loans at their current 3.4 percent for two more years.

Democrats said their plan would protect borrowers and give lawmakers time to work on a more comprehensive, long-term solution. Republicans, such as Senate Republican leader Mitch McConnell of Kentucky say any solution should be a permanent one, rather than a “short-term political patch.”

“[Richard] Burr (Senator-R-NC) said Republicans want to provide a predictable mechanism to set interest rates for students, rather than returning to the table every year.’ Congress shouldn’t be sitting in Washington deciding with a dartboard what student loan interest rates should be,’ he said.

“President Barack Obama has also proposed a market-based plan. Under his proposal the borrowing rates would remain fixed for the life of the loan.”

Wait a minute, haven’t we seen this before? Congress creating a short-term fix and putting an “unthinkable” consequence for not passing a longer term plan within a certain time-frame? Why yes, yes we have. It is essentially the same progression as the “debt-ceiling”, the “fiscal cliff”, and the “sequester”. If we have learned one thing from recently political gridlock it’s that this tactic is ineffective—in Washington today politicians on both sides of the political spectrum are willing to let “unthinkable” events pass in order to avoid compromising (although not evenly distributed between both sides, I’ll let you guess which side I think is more reasonable).

While it is true that another month remains before rates are set to double, anyone banking on a compromise within that time is either incredibly optimistic or has not been following politics for the past half decade.

Recent statements by Senator Bob Dole on “Fox News Sunday”, highlighted in a NYT article, show that not only liberals think Tea Party Politics are hurting America:

“It seems to be almost unreal that we can’t get together on a budget or legislation,” said Mr. Dole, the former Senate majority leader and presidential candidate. “I mean, we weren’t perfect by a long shot, but at least we got our work done.”

The current Congress can’t even do that, thanks to a furiously oppositional Republican Party, and that’s what has left mainstream conservatives like Mr. Dole and Senator John McCain shaking their heads in disgust.

The difference between the current crop of Tea Party lawmakers and Mr. Dole’s generation is not simply one of ideology. While the Tea Partiers are undoubtedly more extreme, Mr. Dole spent years pushing big tax cuts, railing at regulations and blocking international treaties. His party actively courted the religious right in the 1980s and relied on racial innuendo to win elections. But when the time came to actually govern, Republicans used to set aside their grandstanding, recognize that a two-party system requires compromise and make deals to keep the government working on the people’s behalf. “

Barbara Bush, first lady to President George H W Bush, had similar thoughts in the issue of partisan divide:

“’They are going to have to compromise,’ said Barbara, the wife of former President George H.W. Bush. ‘It’s not a dirty word.’”

This position is unsurprising considering her husbands political history. “To reach agreement with Democrats who controlled both the House and the Senate, [H W] Bush accepted a deficit-reduction plan that raised income-tax rates—breaking his “read my lips” tax pledge from the 1988 presidential campaign. In protest, Newt Gingrich, then the House minority whip, quit the talks and led a rebellion that ultimately persuaded nearly half of Republicans in the chamber to abandon Bush and oppose the deal.

Bush’s budget package established the foundation for further deficit reduction under President Clinton in 1993 and 1997. Those agreements fueled the 1990s economic boom and produced three consecutive balanced budgets in Clinton’s second term. But it was Gingrich’s revolt in the name of inviolate principle, not the elder Bush’s flexibility in the face of divided government, that left a lasting imprint on the GOP.”

Economic advisor to Presidents H W Bush and Reagan, Bruce Bartlett, is an Economix blogger for the NYT, and a prominent example of a conservative turned liberal due to the G.O.P’s philosophy on political economy.

Tea Bagger’s cannot claim core Republican values from some “Golden Age” in the 1980s and 90s, because the very people who were running the G.O.P. back then have renounced the Tea Bag movement:

“I’m not all that interested in the way things have always been done around here,” Senator Marco Rubio of Florida told The Times last week.

I hate to beat a dead horse (elephant?), but if you look at congressional approval ratings over time, perhaps it would make more sense to defer to the more experienced and knowledgeable politicians who once ran your party.

A primary function of the legislative branch, known as “vertical accountability”, is to represent citizen’s voice in government agenda-setting and policy making processes. With only 16% satisfaction, can there be any question that partisan politics have prevented legislators from doing their jobs?

Many countries have mechanism for a disillusion of parliament, based on differing criteria. Perhaps the time has come to consider a Constitutional amendment stipulating instances in which either the House and / or Senate can be dissolved due to incompetence.

It is not too far ahead to look forward to the 2014 midterm elections. These elections represent a major turning point in U.S. political history. An absolute majority for the democrats will further embolden the mandate Obama believes his re-election signified—a more progressive, meritocratic, and egalitarian vision of America. If democrats fail to seize this opportunity, we can expect two more years or relative government inaction leading up to the 2016 elections.

Back on subject, I believe that Obama’s plan is a reasonable compromise between the two sides. I agree with Senate Republican leader Mitch McConnell that short-term patchwork policies are no way to treat any legislation, particularly one with such long-term implications as student loan repayment. But I also agree with general democratic opposition to tie rates to market values, as the volatility in U.S. bond markets does not offer much security to potential student-loan candidates.

The Obama plan is good because while the current market sets the rate, there is the stability of having that rate locked in place. When the economy is doing well, and there is low unemployment, rates will be higher; signaling that a prospective student may be better served joining the labor force. When there is a lack of jobs, and the opportunity cost of attending college is lower, this will be reinforced by lower borrowing rates (as we see now).

Of course the ultimate factor of how much student debt one accumulates is the cost of their institution. Public state, city, and community colleges offer an affordable alternative that leaves students with much less debt, which mitigates the effect of changes in student loan rates in general (as opposed to someone who takes on more debt at a private college).

Needs-based grants are often available to students who show academic promise but cannot afford to attend schools. Changing affirmative action to a more needs-based socio-economic program, instead of a race-based program, could make the program work as it was originally intended, which was to help disenfranchised Americans realize the “American Dream” of social mobility.

One criticism of this policy is that it is somewhat deterministic, in that at times when T-bill rates are high, many students who would benefit from going to college may decide they cannot afford it.

The opposition to the Obama plan is that by fixing rates at a certain level for the life of the loan, the U.S. government may be on the hook for a large subsidy when T-bill rates go up. Let’s say I lock in a loan at 2%, and the government now has to pay 8% interest to borrow money, the government is taking a large loss there.

But that is the government’s job, to provide financing for important programs. Schooling should be subsidized for all the benefits it produces. Senator Burr is correct, the U.S. government should not unilaterally set rates. It should, however, provide Students with the security of knowing at what rate they will have to pay back student loans, given the long-term benefits that education gives and the financial uncertainty facing 99.99% of Americans (basically anyone who cannot fall back on family wealthy).

Subsidizing student loans, changing affirmative action to a needs based program, and making available cheaper public education alternatives, is three-sided approach that can drastically increase social mobility in America.


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Economic Outlook: Financial Flows,Taxation, and Accountability

The primary function of taxation is to collect revenue to pay for public goods and services. Public goods and services are non-rival and non-excludable, they therefore often suffer from a “free-rider problem” (people benefit from the positive externalities regardless of whether they pay into the cost of the good or not). It is because of this free-rider problem that the private sector cannot efficiently provide public goods, necessitating what is sometimes referred to as the “social contract” between people and their governments (I will give up something, in this case money via taxation, in order to have certain publicly provided provisions). Examples of public goods are basic infrastructure (such as roads), and public services (such as police officers, firefighters, and public school teachers). 

Individual countries decide for themselves at what level taxes should be set, and what should be provided for via taxation. Individual countries also decide to what extent taxes should be progressive or flat. But across the world, in societies as fundamentally different as you can imagine, this general “social contract” relationship exists. Taxes also provide resources for social safety-net programs, which are important for inter-generational income smoothing, social mobility, and reducing inequalities (despite the “47% argument”)

Taxes can also be used for legitimizing purposes. Every modern country has tax collection and income monitoring services (performing similar functions as the IRS in America). One of the major functions of these organizations is ensuring that everyone pays what they are supposed to. A secondary function is to provide legitimacy to ones income; if someone claims large amounts of money with a questionable source, it will raise a red flag, and an investigation will ensue (if the system is working properly).

Taxes can also be used to influence ones behavior. The tax on cigarettes in NY is a good example of this. While the government cannot stop people from smoking, they can make it prohibitively expensive to smoke in hopes that people pursue healthier activities.

These are just some of the general functions of taxation.

As we know here at NN, not everyone plays by the rules, particularly when it comes to taxation. Offshore banking is a huge problem, perpetuating income inequality,  human rights abuses, and robbing governments of resources to fulfill their obligations. Some countries systematically provide rock-bottom tax rates and legitimacy for depositors without properly vetting the source of their money, leading to destabilizing financial inflows that dwarf the countries annual output (Cyprus is the most recent example you may remember).

As governments face difficult choices in the wake of the Great Recession, it has become more and more obvious that greater coordination and accountability are needed between countries to ensure that the world’s wealthiest pay their fair share for the public goods and services that have helped them to amass their wealth (and are held accountable for their role in the Great Recession).

The silver-lining of the Great Recession is that much more focus has been put on destabilizing forces that have accompanied financial globalization (and more recently technological advances which have made high speed / arbitrage seeking investment all the more possible). One example of this is the breaking of secrecy by Swiss Banks. Swiss Accounts are arguably the most famous example of elite tax-evasion; their exposure serves as a symbolic as well as practical turning point in offshore banking history. Another example is the imposition of a financial transaction tax (FTT), even if it has been watered down for now.

Swiss Banking:

“The Swiss government said on Wednesday that it would allow its banks to disclose information on American clients with hidden accounts, a watershed move intended to help resolve a long-running dispute with the United States over tax evasion.

The decision, which comes amid widening scrutiny in Europe of tax havens, is a turning point in what has been an escalating conflict between Switzerland and the United States.

Eveline Widmer-Schlumpf, Switzerland’s finance minister, said the move would enable Swiss banks to accept an offer by the United States government to hand over broad client details and pay fines in exchange for a promise by United States authorities not to indict any banks.”

“Ms. Widmer-Schlumpf declined to say how much banks might have to pay. But she said the Swiss government would not make any payments as part of the agreement. Sources briefed on the matter say the total fines could eventually total $7 billion to $10 billion, and that to ease any financial pressure on the banks, the Swiss government might advance the sums and then seek reimbursement.

“It is important for us to be able to let the past be the past,” Ms. Widmer-Schlumpf said at a news briefing in Bern, Switzerland. She declined to give any details about the program, but said banks would have one year to decide whether to accept the American offer.

American clients whose names are handed over by Swiss banks but who have not voluntarily disclosed hidden accounts to the Internal Revenue Service would probably face criminal tax-evasion charges, lawyers said. Dozens of Americans have been indicted or charged in recent years for failing to disclose their accounts.”

Calling the decision ‘a good, a pragmatic solution for the banks to emerge from their past,’ Ms. Widmer-Schlumpf said, ‘We expect this to create the base for banks to again gain some room for maneuver so that calm can return to the sector.’”

“‘This is an important step for the banks; it will apparently allow them to disclose statistical information, such as the number of accounts with U.S. beneficial owners, the number of accounts with foreign corporations or foundations, and the amount of assets under management,’ said Scott Michel, a tax lawyer in Washington, D.C. ‘The I.R.S. and D.O.J. can use this information as the basis for financial penalties under settlement agreements, which might be deferred-prosecution agreements or non-prosecution agreements.’”

It seems Switzerland wants to shed it’s stigma of an off-shore tax haven, and move forward with a more sustainable and transparent financial sector.

“‘Resolution of the conflict ‘has taken longer than it should have, with a lot of otherwise avoidable damage suffered on the Swiss side,’ said Robert Katzberg, a white-collar criminal defense lawyer in New York with Swiss and American bank clients. ‘But it now appears the end is in sight.’”

Financial Transaction Tax: It is no secret that irresponsible lending practices perpetuated financial bubbles around the world which eventually led to the Great Recession. One way of holding financial institutions responsible for their role in the Great Recession, while also raising revenue governments desperately need, is a financial transaction tax (FTT). CESR is a great resource for background info on the financial sectors role and human rights implication of The Great Recession, as well as the FTT.

A recent NYT article is critical of a watered down FTT in the works in Europe. While I agree it is disappointing the tax has been significantly reduced, the introduction of any FTT is a movement in the right direction. An incremental approach may be the best way to introduce this important new policy, and give it a real chance to work (instead of leading to large-scale capital flight to non-FTT countries):

“European countries planning a tax on financial transactions are set to drastically scale back the levy, cutting the charge by as much as 90 percent and delaying its full roll-out for years, in what would be a major victory for banks.

“Under the latest model, the standard rate for trading bonds and shares could drop to just 0.01 percent of the value of a deal, from 0.1 percent in an original blueprint drafted by Brussels. That would raise only about 3.5 billion euros, rather than the 35 billion initially forecast, a senior official said.”

“The tax may now also be introduced more gradually: rather than applying to trades in stocks, bonds and some derivatives from 2014, it may apply next year only to shares. Bond trades would not be taxed for two years and derivatives even later.

The roll-out could be scrapped altogether if, for example, the tax pushed traders to move deals abroad to avoid paying it.”

“The Financial Transaction Tax (FTT) resurrects an idea first conceived by U.S. economist James Tobin more than 40 years ago and has been symbolically important for politicians to show they are tackling the banks blamed for causing the financial crisis.”

‘You can introduce it on a staggered basis,’ said a second official. ‘We start with the lowest rate of tax (0.01 percent) and increase it bit by bit.'”

“‘The risk is that if you have some countries not participating, you have some shift of business from the countries in the tax to the countries without the tax,’ said one official, familiar with French government thinking. ‘This step by step approach can make sense.’

There is also the issue of which financial assets should be included in the proposed FTT:

“Within the group of 11 countries, Italy and France have expressed concerns about widening the tax beyond shares to government debt as both believe it could discourage investors from buying their bonds.”

I agree with Italy and France on this issue. The main reason many Euro countries are facing such crippling austerity is due to a “sovereign debt crisis“. These countries cannot afford to borrow sustainably, forcing them to make painful cuts which have led to a double-dip recession and high unemployment throughout Europe.

The FTT could potentially add to the borrow costs governments face if it included bonds as well. If however, a tax included everything except bonds, it would have the effect of lowering government borrowing costs. Making other financial transactions more expensive would make bond purchases more profitable by comparison (assuming financial institutions will pass on some portion of the tax to the customer, which is a pretty safe assumption). While the difference would be marginal, even a marginal decrease in borrowing costs can unlock millions if not billions in government resources.

What we see is the international community slowly working to make financial globalization more accountable and sustainable. While we may be frustrated with the slow rate of progress (as the author of the NYT article clearly is), it is important to realize that we are making meaningful progress.

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 as a global community learned lessons (albeit incredibly hard learned lessons) and are taking steps to ensure we do not repeat our past mistakes.

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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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Economic Outlook: “American Winter”`

Yesterday a friend of mine, Adam Blejer, pointed me towards an HBO documentary, “American Winter”. He thought, rightfully so, that the message conveyed in the documentary was one that I may be interested in and have some insight on. Always eager to learn from my followers and get them involved, I looked into the documentary.

I should say now that I was unable to actually watch the documentary, as I do not have HBO on demand. What I was able to do was read the summary of the documentary by the producer, which can be found here. This actually helped me analyze the documentary more clearly for two reasons. One, I have the meat and potatoes of the documentary spelled out in front of me, I did not have to watch and take notes or worry about missing anything, it is all there for me to go back and check on. Second, I was able to see the underlying argument without getting emotionally wrapped up in the struggles of the people in the documentary. This would have made an unbiased critique difficult if not impossible.

Without further ado, an analysis of the documentarian’s message:

The first thing I analyzed was any message conveyed based on economic indicators. In the first paragraph, I saw something that could not look right. “Yet 46% of this country is living in poverty, or near poverty, and today we have the highest number of poor since we began keeping records.” This is a slight of word, as the official U.S. poverty rate as of 2011 was 15%–31% of that 46% may be living “near poverty”, but are not actually living in poverty.

One has to be careful, as poverty rates are based on a benchmark rate; set that rate too high and everyone is in poverty, set that rate too low and some people who are truly struggling to survive will not be counted. The census bureau is very transparent about how they find their numbers; an explanation can be found here. I will leave it up to you to determine whether the numbers are too high or too low, but that 46% was an obvious shock value number—many of those 31% living “near poverty” have much much more than even the “wealthy” in less developed countries.

Which brings me to my next point, about inequality in the U.S.: “The Gini coefficient is commonly used as a measure of inequality of income or wealth and is accepted as a fair method to compare income inequality in different countries.  According to America’s Gini coefficient of 0.450, the U.S. ranks near the extreme end of the inequality scale, comparable with Cameroon, Madagascar, Rwanda, Uganda and Ecuador.  China is significantly more equal than the U.S. with a Gini coefficient of 0.415, and India is leagues ahead of the U.S. on income inequality, with a Gini coefficient 0.368.  Even Russia is less unequal than the U.S., at 0.422 Gini.”

The Gini coefficient ranges from 0-1; the closer to 0 the more equally a countries income is distributed.The .45 number checks out, although it is significant lower once you account for taxes and transfers. There are structural issues that have lead to this inequality; low investment in social programs, preferential tax rates on capital gains and other subsidies which disproportionately go to the wealthy, and the decline of union power are all common examples.

However, there are notorious shortcomings for comparing Gini coefficients between countries. For one thing, the same Gini coefficient for two countries can mean different things. Whenever you aggregate numbers, information gets lost in that aggregation. Also, in some countries such as China and India, the most impoverished experience “extreme poverty”. While relative poverty of course exists everywhere, extreme poverty exists only in the developing world. For these reasons, it is irresponsible to say “The Gini coefficient…is accepted as a fair method to compare income inequality in different countries.” This is far from a consensus amongst academics and policy makers.

Next I examined the ethical argument over the welfare state, the “makers vs. takers” argument if you will. Paul Krugman has done a great job of highlighting how transfer programs tend to amount to inter-generational consumption smoothing; you borrow when you’re young, work and contribute when you’re in the prime of your life, and then retire and take from the system again. This formula has underpinned political economy and tax philosophy for decades if not centuries, and it works. In fact, there is really no alternative that works remotely as well in creating the opportunity for social mobility.

Here’s the filmmakers take on the subject:

“How can nearly half of our country be in such dire circumstances and yet our politicians chose this time of the most need in 80 years to cut budgets and social services all across the country?  It’s because there are such pervasive myths and stereotypes about those families who need help—they are lazy, they are takers, they are incapable, they made bad decisions—so we don’t need to care about them.  But as we made American Winter we found a very different story.  The families who we followed for this film are struggling, yet they are just like our friends, neighbors and members of our own family.  They are hardworking, loving folks who have had a bit of bad luck, a job loss, a health issue, a death of a parent, a handicapped child.  These events have set them back and then life becomes an uphill battle to get back on their feet again.”

This is a problem I tend to have with documentaries, is that they cherry pick information. Certainly some people who need help actually need it temporarily to help them get back on their feet. But you can be equally certain that there are some lazy people who rely on handouts their whole lives, people who “game the system”. It is because people see the world as black and white that it is so hard to work on reforms that can strengthen the welfare state and make it work more effectively. This is why politicians talk past each other, instead of deliberating and debating in order to come to reasonable compromises that work for the American people.

Another issue the summary touches on is the inter-generational nature of poverty; what economists refer to as poverty traps:

“In making American Winter we saw firsthand how stressed and scared these parents are everyday by the prospect of losing their homes, and by the daily struggle to pay their bills.  However, the most overwhelming part was seeing the kids who have lost hope for their future.   These kids see their parents work extremely hard, and the kids say to themselves, “we’re barely getting by everyday, how am I going to make it when I grow up?”  And losing that sense of optimism and hope does not bode well for a child’s future.”

“Studies show that it is cheaper to help families before they become homeless.  And it is cheaper to help families before the kids are traumatized by living with food and housing insecurity, because those kids don’t do as well in school and they are more likely to wind up on drugs or in the prison system.  Those costs to society will affect all of us for ten, twenty, thirty years to come.  Yet even though it is cheaper to help families, to get them to a place where they are stable and productive, we seem to turn a blind eye and tell these families that they are on their own.

Every one of us needs help at some time in our lives.  But the idea that families who need social services are “takers” is one of the most destructive myths of all.  The perception is that our tax system and our government disproportionally helps the less affluent at the expense of the wealthy.  In fact, the U.S. government spends $400 billion a year on tax policies intended to help families save and invest.  In 2010, the wealthiest 5% of taxpayers averaged a net benefit of $95,000 each, while the bottom 60% received an average benefit of $5 each.”

I have written about poverty traps many times here at NN, just search poverty traps in the search bar and you will see in how many different contexts poverty traps exist. I fully agree that it is cheaper and more effective to attack the root causes of poverty before they become a problem. I do not know the methodology the filmmakers use to come to their conclusion, but it fits into a general philosophy I have on the subject; that any money saved in the short run by cutting social programs will be dwarfed by increased future spending in the welfare and penal systems.

So while some of the figures and concepts the documentary pronounces may be a bit stretched (as is common with documentaries, as they are meant to have shock value), the overall message is one that I cannot (and do not wish to( refute. Income inequality is too high in America, and it is this way due to structural flaws in our fiscal and tax policies. Sequestration and other short term budget cuts are like putting a Band-Aid on a gunshot wound, it may stop the bleeding for a little but in the long run the problem will be worse.

Capital gains taxes remain too low, even as they have risen from 15 to 20% following the “fiscal cliff” deal. Joseph Stiglitz explains quite eloquently how this perpetuates financial bubbles and takes talent away from more sustainable fields (such as medicine, teaching, manufacturing; basically anything not associated with capital gains).

Meanwhile, no meaningful financial reform has taken place since the financial crisis. The same concept of “securitization” is beginning to rear its ugly head again. We must learn as a country from our past failures, and demand our elected officials enact policies that our in our best interests as a nation (I have often said that the only special interest group Congress should be worried about is the American people).

It is the job of the American people to hold their elected officials accountable, and vote for the politicians that support the policies that we as a nation know are right (or at least vote against politicians who support policies that have been tried and failed).


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Economic Outlook: Ryan’s “Path to Prosperity”, But For Who?

Yesterday, Paul Ryan unveiled his budget proposal for 2014, titled “The Path to Prosperity”. Instead of taking his Vice Presidential defeat as a sign that America rejects his fiscal doctrine, Ryan has doubled down on his ideas.

A common criticism of Ryan’s plan during the Presidential campaign was that he never specified how he would achieve a balanced budget, but merely said that cuts will equal this amount, and without raising taxes we will have a balanced budget in 10 years.

The plan is now public domain, and it is safe to say “the devil is in the details”. Here are some highlights of the Ryan proposal:

  • Repeal the Affordable Care Act
  • Cut spending on Education, R & D, cap Pell Grants
  • Cut funding for a trans-American high speed rail and other infrastructure improvements
  • Turn Medicare into a voucher program (ensuring it is underfunded for those with serious chronic conditions)
  • Re-instate the work requirement for Welfare
  • Reduce spending on welfare programs, such as SNAP (food stamp programs)
  • Maintain current high levels of defense spending
  • Does not address the issue of Social Security spending
  • Create a two-bracket tax-system: Reduce top tax rates to 25% (from 39.6), make the lower rate 10% (no more people with 0 or negative tax rates).
  • Reduce the corporate tax rate to 25%, presumably lower capital gains taxes, repeal the Alternative Minimum Tax
  • No additional revenue through closing tax loopholes

The only thing I agree with is Ryan’s assertion that welfare should have its work requirement reinstated. However, this can only occur once unemployment reaches a certain level; you cannot tell people they need to work to receive welfare payments if that work does not exist. By cutting discretionary spending, there will be less government jobs, and the private sector does not seem to feel any need to increase hiring anytime soon despite record profits, so this is really a squeeze on those “takers” that the G.O.P. loves to hate. (Also, this provision was only intended to be temporary as the economy recovers, so the one provision I agree with in Ryan’s budget is not exclusive to Ryan’s budget).

Everything else amounts to class warfare. Cutting spending on education will hurt those who rely on public education (and make Obama’s pre-school / child care programs more difficult to fund, making it harder for lower income workers who cannot readily afford personal child-care). Repealing the Affordable Care Act, reducing Pell grants, and reducing Welfare payments will all disproportionately affect the poorest Americans.

The only discretionary programs that Ryan does not think needs to be cut are defense. This is an odd position, as defense spending accounts for whopping 24% of the 2013 Federal budget (for comparison sake, education (4%) and welfare (11%), do not even combine to come close to defense spending). Yes we have a spending problem, a military spending problem (and social security and medicare need to be overhauled in the long run, but that has nothing to do with getting the American economy producing at potential in the short run), yet somehow the fiscal conservative Ryan found cuts in every other program other than defense.

https://chart.googleapis.com/chart?cht=p3&chs=600x200&chf=bg,s,e8e8ff&chd=t:23,24,4,24,11,2,3,1,3,7&chl=Pensions%2023%|Health%20Care%2024%|Education%204%|Defense%2024%|Welfare%2011%|Protection%202%|Transportation%203%|General%20Government%201%|Other%20Spending%203%|Interest%207%&chtt=Budgeted%20Federal%20Spending%20for%20%20-%20FY%202013

 

On the other hand, Ryan wants to make the wealthy even wealthier. Reducing the tax rates for the wealthiest to 25% (their lowest level in decades), corporate and capital gains taxes (which all go almost exclusively to the richest Americans), will make the rich richer. By levying a minimum 10% tax rate on even the poorest Americans, those who will be squeezed by Ryan’s proposed cuts in discretionary spending will also see their tax bill rise. In effect, Ryan has financed lower taxes for the wealthy with higher taxes for the poor. He has replaced an Alternative Minimum tax for the wealthy with a minimum tax for many people who currently do not pay any taxes (due to being below a certain income threshold and having standard deductions erase their tax bill).

The Democratic plan is, as expected, much more in touch with what America needs:

“The Senate Democratic budget proposal, which began leaking out just as Ryan announced his proposal, would shrink budget deficits by $1.85 trillion over 10 years but not balance the budget. It is largely the work of Democratic Senator Patty Murray of Washington, who heads the Senate Budget Committee.

It would rely on an equal mix of spending cuts and tax hikes on the wealthy. At the same time, it would create a $100 billion fund for rebuilding crumbling roads and bridges, creating construction jobs.”

This budget relies on short term stimulus to reduce unemployment and get the economy working closer to potential output. It realizes the need to put idle labor to work, while reducing the deficit gradually through a combination of closing tax loopholes and spending reductions. It would keep hard fought victories such as the Affordable Care Act and higher taxes on the wealthy in place, while keeping the deficit at a sustainable level.

Paul Krugman recently wrote an interesting piece on cyclically adjusted deficits:

First, fluctuations in the deficit tend to be driven by the business cycle; when the economy slumps, revenues fall and some kinds of expenditure, like unemployment benefits, rise. You want to take out these “automatic stabilizers” when assessing the underlying state of the budget.”

Second, we don’t have to balance the budget to have a sustainable fiscal position; all we need is to ensure that debt grows more slowly than GDP”

The piece basically highlights that once you account for entitlement spending dropping and GDP increasing as the economy recovers, we already have a sustainable fiscal outlook. The “need” to balance the budget in 10 years is made up, and the benefits of doing so questionable at best (and non-existent at worst). But the social and economic costs, both in the short run and long run of Ryan’s proposal, are real, and they are high.

So when you hear about Ryan’s “Path to Prosperity”, ask yourself who is it really a path to prosperity for? Is it a path to prosperity for those who need help getting there, or those who are already prosperous? Will it increase of decrease inequality and social immobility that has come to define this country?

I will let you draw your own conclusions, as the two plans are essentially the same as they have been since the election.  Obama has recently conceded that a deal may not be able to be reached, that the sides may be too ideologically opposed. This would be unfortunate, but it also is starting to seem like a more and more realistic outcome. “The Sequester” looks mild compared to Ryan’s alternative, and unless the GOP is willing to move considerably from this proposal, it is unlikely a deal will be done until after 2014 congressional elections.

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