Normative Narratives

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Bizarro Egypt

Egypt has actually turned into Bizarro World–the country is literally upside down. I swear you can’t write this stuff, or maybe you can… either way, I can’t. But I can analyze whats going on with some clarity and insight:

  • The first democratically elected President in Egyptian history is in jail for crimes against the regime of popularly toppled autocrat Hosni Mubarak.
  • At the same time, it appears said toppled autocrat is said to soon be released from jail (cases are heard by a judiciary that is largely still intact from Mubarak’s days in power)
  • The Egyptian government has shut down all national media outlets sympathetic to the Muslim Brotherhood, while stepping up anti-Brotherhood rhetoric and propoganda.
  • At the same time, General Sisi lashed out at foreign media outlets for not evenly portraying both sides of the story; essentially for not recognizing the Brotherhood as a terrorist organization. Does Sisi actually thinks he can control what independent international media outlets report?
  • Sisi also insists he has a “mandate from the people” to provide security from “terrorists”. No mandate can give the authority to kill innocent people with impunity. Democracy is about indiscriminately upholding and protecting the rights of everyone, not only certain groups.
  • Far from trying to justify the killings, and offer any sort of olive branch or iota of accountability, the Egyptian government has commended itself for using “a huge amount of self-restraint and self-control.” Who exactly are they trying to convince, the international community, Egyptian civil society, or themselves?
  • The United States decides not to suspend aid to the Egyptian military, despite the insurmountable evidence that what has transpired in Egypt since July 3rd was a coup. The official U.S. ruling on whether or not the Morsi ouster was a coup: “it is not in our national interest to make such a determination.” Way to really lead by example there America!
  • It now appears that the U.S. and the E.U. are finally going to review their ties with the current Egyptian government–a little bit late but still good news. The first official move against the Egyptian government, the U.S cancelled joint military exercises–also a good move.
  • The next move makes no sense; the U.S. plans to pull the plug on $250 million in government aid, while leaving $1.3 billion in military aid in tact. In other words, aid that could give the U.S. some leverage in the Egyptian political arena, or for economic development projects that would benefit all Egyptians, is being cut. At the same time, we will continue to supply the Egyptian military with hundreds of millions of dollars in firepower, because you know killing all those “terrorists” won’t be easy…

Egypt and the Middle East in general are at a crossroads. Both the U.S. and the E.U. are currently reviewing their relationship with the Egyptian government, so it is likely we will have a clearer picture of their respective stances soon. Should Egypt deteriorate into civil war, it will be interesting to see if there is another U.N.S.C. showdown between “Western Powers” and China and Russia along the lines of the current Syria impasse.

I have read articles saying this is not the time for Democracy in Egypt or the Middle-East, that we should set our sights lower and hope for stable governments. While these articles make goods points and tend to be well written, I refuse the believe this is true. I am of the belief that the majority of all parties and factions in Egypt want the same thing; security, health, family, an opportunity to realize their full potential and a better future for their children. 

Not to get to abstract or philosophical, but the future is yet unwritten; if we set our sights low, then we will never know if we could have done better. Much of the groundwork for realizing the normative goals of the Arab Spring is still as ripe as it will be for some time. Old autocracies have been broken (although the inability for democracy to fill the power void has created opportunities for a return to autocratic rule that vested interests–who tend to be opportunistic by nature–will fight for tooth and nail, bullet and rocket). People have never been as empowered as they are today, thanks to innovations in ICT, social media, and the unprecedented recognition of human rights as the key to sustainable human development by the international community.

The international community can no longer turn a blind eye or claim ignorance, not in 2013. The world is getting smaller, and global action or inaction affects all of us, whether we want to admit it or not. By turning a blind eye to Sisi’s gross human rights violations and abandoning the goal of pluralistic democracy in the ME, we would essentially be putting a band-aid on a festering infected gash. Surely the international community can help the Egyptian people come up with a better and more sustainable solution than that.

We cannot let determined spoilers derail this goal, or “put it off for a few decades”; this is not an acceptable solution and will lead only to another round of autocracies in the Middle-East. This would only serve to further cement the ideas that only autocracies can survive in the ME / democracy cannot exist in the ME, that Political Islam and democracy are irreconcilable, and that Jihad is the way for young Muslims).

The goals of the Arab spring have not been fully met–anybody who thought establishing effective democracies in the ME could be achieved quickly, linearly, or peacefully was fooling themselves. But we cannot abandon those goals; if we do because the global champions of human rights / democracy think they cannot afford to help, or that the time is not right due to regional security concerns, the opportunity may not arise again for decades.

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On a personal note, as a progressive Jew from NY, I never would have thought that I would be sympathetic to the Muslim Brotherhood…a coup, a series of massacres, and gross human rights violations make for strange bed-fellows no?

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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.

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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.

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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.’”

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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.’“

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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.

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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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Transparency Thursday: In Response to the Bangladeshi Factory Collapse, Who is Responsible for Ensuring Safe Working Conditions?

Body carried from Rana Plaza. 9 May 2013

The collapse of the Rana Plaza Complex in Dhaka, Bangladesh was a tragic event which has resulted in the deaths of more than 1,100 people. If there is any silver lining to this horrific event, it is that more attention is being paid to factory safety conditions and workers rights in Bangladeshi factories and in the garment industry as a whole. Bangladesh is the second largest producer of apparel globally after China.

The origin of goods and a consumer demand for sustainable production processes has its origins in the food production industry. The trend has expanded into the garment industry in recent years. When garment producers first came under scrutiny, much of the focus was on workers rights. “Sweatshops” and child labor became lightning-rod issues. While these issues have not been fully eliminated, progress has been made—the “spotlight effect” can greatly change the actions of large MNCs. The new issue on consumer and producer agenda’s is factory safety conditions. How best to address this issue is open for debate.

In the past week, many European and a few American clothing producers have agreed to sign onto a legally enforceable plan which mandates; “rigorous, independent factory inspections, and helping to underwrite any fire safety and building repairs needed to correct violations.”

An alternative approach, championed by The Gap, seeks a watered down version of the plan without the legally binding aspect. “Under Gap’s proposal, if a retailer were found to have violated the agreement, the only remedy would generally be public expulsion from the factory safety plan.

“The U.S. is quite litigious,” said Bill Chandler, a Gap spokesman. “We put forward specific proposals that we thought would bring other American retailers into the fold. We thought it would be a step forward and would turn it into a much more global agreement.”

According to Gap, its plan is not to exonerate companies from having a legal obligation, but rather an attempt to bring many more companies on-board. Admittedly, the spotlight-effect of public expulsion from such a plan would probably be very costly for a clothing producer, leading the company to seriously consider internalizing the cost of bringing its factories up to code.

Walmart is planing on its own internal safety audit system,which is likely to be rife with conflicts of interest. Walmart’s reasoning is efficiency, it does not believe a global mechanism can work efficiently as there will be lots of bureaucracy involved.

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I believe a large element of the picture has gone largely unnoticed in the aftermath of this tragedy—the role of Government on working conditions. What exactly are Bangladeshi factory safety-standards like? How do they compare to other developing / developed countries? If the rules on the book are not adequate, then requiring MNCs to underwrite getting up to code will not fix anything. If the rules are adequate, and are simply not enforced properly, then requiring producers to pay for bringing factories up to code should theoretically work.

The Bangladeshi government response has been significant. “This week the Bangladesh government said it had closed 16 garment factories in Dhaka and two in the south-eastern port city of Chittagong for safety reasons after the collapse of Rana Plaza.

“These factories will only be allowed to reopen after they have made structural and safety improvements,” a senior official of the labour ministry said. “Every factory in the country will be inspected as part of a government initiative to ensure safety.”

There are concerns that corruption and political influence may allow owners to evade regulations.”

Again, is the issue the laws in place, or how they are enforced? Actions by the Bangladeshi government make it seem like it is an enforcement issue. If this is the case, the issue likely reaches beyond apparel and is one of corruption and lack of transparency (and is likely government-wide). Is the movement towards stronger enforcement authentic, or is it merely an attempt to appease clothing producers until media attention dies down?

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Ultimately, a mixed approach will need to be taken. Pressure has to continue to be put on the Bangladeshi government to enforce better safety conditions for workers. In a country with over 4 million garment workers, this is an important step in protecting the rights of Bangladeshi workers.

Pressure can also be put on MNCs by consumers. Consumers can “shop with their wallets”, but will they? I had a conversation with a co-worker, and we both felt that when considering the food and garment industries, it would be harder to pass the extra cost onto the consumer in the garment industry. Our reasoning was that when it comes to food, people are willing to pay extra because they believe they are putting something better into their bodies—it is a mutually beneficial relationship. When it comes to garments, the benefits to the consumer are diminished, far off, and often forgotten except in the direct aftermath of events like the one this article is based on.

So MNC will perhaps have to make up more of the cost on this one. MNCs can also “vote with their wallets”. By shifting production to other countries, the Bangladeshi government will understand the value of having a reasonable minimum standard for worker safety and workers rights. MNCs can pressure the Bangladeshi government to better enforce safety regulations (if the cost cannot be passed onto consumers, perhaps part of it could be shared with the Bangladeshi government). The government’s role cannot be overstated in this issue—without good governance any plans by MNCs will be hampered.

As far as what MNCs can/should do, I think that a more inclusive, less binding plan that relies on the spotlight-effect is more practical even if theoretically less effective. What good is the legally binding plan if the majority of producers do not sign onto it? If a less binding plan got the majority of garment producers on board (as opposed to just a handful), those producers would have a more unified voice. The Bangladeshi government would have less options and ultimately would have to appease MNC s (since such a large portion of the Bangladeshi economy is based on textile exports) by helping enforce stricter factory safety standards.

 A more recent Bangladeshi factory fire, in which 8 were killed, highlighted that there is indeed much more work to be done.

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Conflict Watch: The U.S., Israel, and Syria

Israel launched an aerial strike on Syria yesterday, in response to growing tension in the Golan heights and intelligence that Syria may be moving advanced arms to extremist factions in the region (most notably Hezbollah in Lebanon).

“Many increasingly see no possible positive outcome of their neighbor’s bloody conflict, no clear solution for securing their interests in the meanwhile. Israel’s military leadership now views southern Syria as an “ungoverned area” that poses imminent danger.”

“For Israel, as for other nations, the Syrian civil war presents pressing security challenges, including the prospect of chemical and other sophisticated weapons falling into the hands of rogue groups, and radical Islamists ultimately coming to power. But speaking to members of Parliament from his faction this week, Prime Minister Benjamin Netanyahu signaled a new focus, saying, “The first and primary threat is an attack on our citizens and soldiers from the Golan Heights line.”

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The U.S. is still weighing it’s options in Syria, although Israeli actions may force the Obama administrations hand. America and Israel both seem reluctant to send ground forces into Syria for different reasons, it seems that military aid and aerial support are the two most likely forms that increased intervention will take.

“So far, President Obama has been reluctant to get involved in the Syrian conflict. He has ruled out placing American forces on the ground, a stance he reiterated on Friday at a new conference in San José, Costa Rica, where he was meeting with Latin American leaders.

Mr. Obama told reporters he did not foresee a situation in which “American boots on the ground in Syria would not only be good for America but also would be good for Syria,” adding that he had consulted with leaders in the Mideast who agree.”

“Mr. Obama has always made clear that any action should be taken with allies and neighbors. But NATO has been reluctant, and Russia, which keeps a naval base in Syria, has been opposed. Israeli officials have said that they do not want to go into Syria, fearing that any Israeli attack would fuel Mr. Assad’s argument that the civil war in his country is the result of foreign provocations. Some Israeli officials have argued that the Arab League should be in the vanguard of any attack, but it has shown little interest in direct military intervention in the Syrian conflict.

That has left the same trio that led the attack on Libya in 2011: the United States, Britain and France. There has been constant discussion among their militaries about “options of every kind,” one official involved in the talks said this week. “Clearly, an airstrike would be much more complex than in Libya,” the official said, noting that most of the targets there were in the desert.”

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By next week there should be lots to talk about on this front, and I will have much more time to look into the matter.

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Economic Outlook: Jobs, Spending v. Austerity, And Obama In Mexico

Hey All,

Finals week began for me today, so I do not have time to do a blog post today (we’ll see about tomorrow, and Next Thursday is also in question)

Some interesting econ news from the usual sources:

Paul Krugman writes on the implications of not having enough inflation on fiscal / monetary policy and economic recovery. This piece goes nicely with last weeks NN Economic Outlook.

There are plenty of pieces on the Jobs report out there. I have learned not to read to much into it, but some people are paid to do that and do a good job of hypothesizing potential causes and effects of changes / trends in the report.

Obama goes to Mexico, only days after the U.S. was rebuffed on the drug front,  and talks about the economic interdependence between the US and Mexico: After a dinner Thursday night with President Enrique Peña Nieto, Mr. Obama told the gathering “we agree that the relationship between our nations must be defined — not by the threats we face — but by the prosperity and opportunity we can create together. And if we are serious about being equal partners, then both our nations must recognize our mutual responsibilities.’’

“We understand that the root cause of much of the violence here — and so much suffering for many Mexicans — is the demand for illegal drugs, including in the United States,” Mr. Obama said. He also said most of the guns that are used to commit violence in Mexico come from the United States.

“I will continue to do everything in my power to pass common sense reforms that keep guns out of the hands of criminals and dangerous people that will save lives in both our countries,” he said to applause.”

Sounds like he’s putting the spotlight on the U.S. congress to pass the U.N. Arms treaty which addresses human rights violations causes by arms trade.

 

When this guy Obama gets lemons, he makes lemonade huh? I guess he’s had a lot of practice dealing with lemons in his first 5 years in office.

 

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Economic Outlook: Fiscal Policy, Monetary Policy, and the Zero Bound

Paul Krugman does a nice job of explaining why unprecedented monetary expansion (“quantitative easing”) has not really moved the needle in terms of reducing unemployment and increasing aggregate demand.

It would be prudent to remind the reader that there has been very little counterfactual analysis of the Feds policies since the Great Recession began (that I am aware of). The situation would almost certainly be worse, higher unemployment and deflation, had the Fed failed to act in the way it is. If you would like to read further on the downward spiral of debt, austerity and deflation in a depressed economy, Irving Fischer wrote on the subject following the Great Depression in a way that is both easy to understand and still as relevant today (perhaps even more-so given how much less politically charged expansionary monetary policy is post-gold standard).

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A liquidity trap is a situation when slashing interest rates on government bonds to near zero percent is insufficient to provide enough credit to allow the economy to produce at full productive capacity. Investors would rather invest in safe government assets with almost no yield then invest in private markets.

I believe a liquidity trap is in itself justification for expansionary fiscal policy. It is basically investors saying to the government, “here, we don’t want to invest our money, so do it for us and just promise to pay us back in the future, don’t even worry about the interest”. But fiscal policy, which originates in the House of Representatives, is politically charged (especially when a government is already highly indebted, then every spending program comes under close scrutiny).

Monetary policy, on the other hand, is much more politically isolated. It originates within the Federal Reserve, which is staffed with economists who understand economics better than politicians. The Fed began by cutting rates, hoping to stimulate aggregate demand.

Once this conventional monetary policy failed, unconventional means were taken; the Fed is buying assets on a large scale, expanding the monetary base. The Fed has pledged to continue to pursue expansionary monetary policy by buying assets on a monthly basis until either the unemployment rate falls below a certain level (I believe 6.5%) or inflation rises above a certain level (I believe 2%).

The Fed made this announcement to try to change people’s expectations. Since you cannot cut nominal interest rates below zero percent (the “Zero Lower Bound”), the Fed hopes to stimulate demand by making people think that in the future inflation will be higher than it is now. If money is worth less in the future, then people will want to spend it now while it is worth more. More spending stimulates the economy and reduces unemployment.

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So why has this policy been ineffective? Well, as I said before, I am not so sure it has been—certainly the situation would be worse right now, not only for America but for the rest of the world which overwhelmingly relies on dollars for international transactions.

But as to why expansionary fiscal policy would be unquestionably more effective, Professor Krugman hits the nail on the head:

“I’m not claiming that there is nothing the central bank can do; but as I’ve tried to explain before, monetary policy can, for the most part, gain traction under current circumstances only by changing expectations about future actions (and changing them a lot). Meanwhile, fiscal policy has a direct, current effect on the economy, which easily trumps attempts to move the economy by changing the Fed’s messaging.

Sorry, guys, but as a practical matter the Fed – while it should be doing more – can’t make up for contractionary fiscal policy in the face of a depressed economy.”

Think of beginners national income accounting, where aggregate demand (Y) = C (consumption) + I (investment) + G (government spending).

Fiscal policy can stimulate AD directly by increasing either G, C, or I depending on how the program is designed.  Monetary Policy, on the other hand, has a much less direct effect. It tries to incentivize people to act a certain way (increase C or I), but people do not always act “rationally” in the economic sense. Sometimes people are so risk averse that even reducing the yield on an investment does not reduce the demand for this investment (particularly in times of economic uncertainty, when I would argue investors tend to become more risk averse).

Also, there is inherently less scrutiny in exactly how monetary policy works. While it is true that some portion of fiscal expansion may be used inefficiently, it is much more tractable than monetary policy.

Monetary policy stimulates AD, but it can also feed into financial bubbles. By providing low interest loans to banks, the Fed is making a leap of faith that the money will be spent wisely. The money should be going to helping people restructure underwater mortgages, or generally providing low cost financing, freeing money for people to spend and stimulate demand. And to a certain extent it is does, but it can just as easily be spent in other less egalitarian ways. If this money goes to Wall St.  investments, the gains will be realized almost entirely by the wealthy.

Evidence exists that this is happening—unemployment remains stuck while financial markets have reached record highs. Securitization, which became taboo after the financial crisis hit, has began to become common practice again. Without meaningful financial reform, the Feds policies could be fueling the next asset bubble.

The Fed has maintained it is keeping a close watch on how its money is being spent, and given the suffering caused by the Great Recession I’m sure it is, but there is only so much it can do. The Fed cannot possibly micromanage how all of its “cheap money” is being spent. The Fed could try to only lend to more people-friendly institutions, such as “credit unions”, or establish mechanisms to lend directly to people and small businesses, but up until this point has either has not or cannot do so (either due to its mandate or due to insufficient manpower for such oversight).

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So expansionary monetary policy has kept the recovery from not being worse than it is (or not being a recovery at all), but it has predictably fallen short of its intended goal. It needs to be complimented by expansionary fiscal policy. That’s not to say that there are no inefficient programs that can be made to more efficient–there almost assuredly are. The stimulus-advocate policymaker should have concrete examples of how resources can be used more effectively, if he has any hopes of convincing his austerity minded counterpart of coming to an agreement. Policy, like markets, requires both competition and coordination to be made as efficient as possible.

The Fed should not reverse course now, but should ensure proper oversight for its policies. The Federal government, on the other hand, seems to be slowly moving from austerity to stimulus. Will common sense and text-book macroeconomics prevail, or will business as usual continue? Only time will tell.

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Conflict Watch: U.S. and its Allies Believe Assad Used Chemical Weapons (But What Does it Mean?)

A little mix-up from our normal schedule. When I saw this article in the NYT this morning I could not concentrate on any economics related news, I will put something out on that front tomorrow.

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“The White House, in a letter to Congressional leaders, said the nation’s intelligence agencies assessed “with varying degrees of confidence” that the government of President Bashar al-Assad had used the chemical agent sarin on a small scale.

But it said more conclusive evidence was needed before Mr. Obama would take action, referring obliquely to both the Bush administration’s use of faulty intelligence in the march to war in Iraq and the ramifications of any decision to enter another conflict in the Middle East.”

Senator Dianne Feinstein, Democrat of California, who is chairwoman of the Senate Intelligence Committee, said the agencies actually expressed more certainty about the use of these weapons than the White House indicated in its letter. She said Thursday that they voiced medium to high confidence in their assessment, which officials said was based on the testing of soil samples and blood drawn from people who had been wounded.”

“In a statement last summer, Mr. Obama did not offer a technical definition of his “red line” for taking action, but said it was when “we start seeing a whole bunch of weapons moving around or being utilized.” In Jerusalem last month, he said proof that Syria had used such [chemical] weapons would be a “game changer” for American involvement.”

“The timing of the White House disclosure also suggested the pressures it is facing. It came the same day that the British government said that it had “limited but persuasive” evidence of the use of chemical weapons, and two days after an Israeli military intelligence official asserted that Syria had repeatedly used chemical weapons.

In a letter to the United Nations secretary general, Ban Ki-moon, several weeks ago calling for a United Nations investigation, Britain laid out evidence of the attacks in Aleppo and near Damascus as well as an earlier one in Homs.

The letter, a copy of which was obtained by The New York Times, reported that dozens of victims were treated at hospitals for shortness of breath, convulsions and dilation of the pupils, common symptoms of exposure to chemical warfare agents. Doctors reported eye irritation and fatigue after close exposure to the patients.

Citing its links to contacts in the Syrian opposition, Britain said there were reports of 15 deaths in the suburban Damascus attack and up to 10 in Aleppo, where the government and rebels have each accused the other of using chemical weapons.”

“White House officials gave no indication of what Mr. Obama might do, except to say that any American action would be taken in concert with its allies.

While lawmakers from both parties swiftly declared that the president’s red line had been breached, they differed on what he should do about it.”

And I honestly could have quoted the whole article; I highly suggest you read it if you are interested in this matter (and if you made it this far you are, so go read it).

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Before I dive into the article, a little background on why chemical warfare is different from conventional warfare. “Chemical warfare is different from the use of conventional weapons or nuclear weapons because the destructive effects of chemical weapons are not primarily due to any explosive force.”

This means that chemical weapons can be detonated without the natural warning that conventional and nuclear weapons carry (the explosion). Chemical weapons can be silent, indiscriminate killers, and have the potential to cause mass destruction (yes chemical weapons are considered weapons of mass destruction).

The U.S. unilaterally denounced the use of chemical weapons in 1969, ratified the Geneva Convention in 1975, and ratified the Chemical Weapons convention in 1997. The U.S. has put a lot of effort into winding down chemical weapon stockpiles both at home and abroad. These are just some of the reasons why a small number of deaths (around 25), in a civil war that has claimed over 70,000 lives, is a “red line” issue.

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Why, after appearing to have his “red line” crossed, is the Obama administration’s response unclear?

Most immediately, I would think of the shortcomings of conventional warfare. The Iraq war was costly, and recent sectarian violence in Iraq shows how unsustainable “nation building” can be (if it is imposed from the outside, accompanied by war, or generally pushed in an unrealistically small time-frame; the process of democratization and modernization is gradual and must come from a countries own citizenry).

There also needs to be concrete proof that Assad used these weapons. There are some who would argue that the opposition has reason to use chemical weapons. If the opposition made it appear that Assad used the weapons, it could tip the fight in its favor. While this is a morally reprehensible thought, “all is fair in love and war”. Realistically it is unlikely that the Syrian opposition, which has been hampered by an arms disadvantage throughout the 2 year civil war, has access to such weapons, even if it wanted to use them to draw outside support. Still, this unlikely scenario must be ruled out before the U.S. gets further involved in the war.    

The Obama administration has said any response would be carried out in coordination with our allies—good! But how much of the response is going to fall on the U.S? France and Britain have been particularly outspoken about EU intervention in Syria. However, a recent article highlights that U.S. military expenditure accounts for about 75% of the NATO budget. The U.S. may want its allies to take a larger role, and our allies may want to take a larger role, but unless leaders can push military expansion in a time when austerity has constrained spending even on important social programs (which I am not certain is the right thing to do or should be these countries top priority given constrained resources), it looks like America will likely be footing most of the cost of any coordinated effort.

But let us not forget our recent $10 billion arms deal with Israel, Saudi Arabia and the United Arab Emirates. The stated purpose of such a deal was to deter a nuclear Iran, but such geopolitical allies would almost certainly have to play a significant role in any coordinated effort to support the Syrian opposition militarily.

Also, Russia and China, Syria’s two largest allies who have continually blocked UNSC intervention, have signed the Chemical Weapons Convention banning the use of chemical weapons. If there is evidence Assad used these weapons, China and Russia may allow a UN military intervention, ending an international stalemate almost as old as the war itself.

If allies in NATO, the Middle-East, and around the world (UN intervention) pitch in, the situation in Syria could change swiftly and drastically.

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There are no easy answers. I would be shocked if the U.S. attempted unilateral and conventional warfare in response to this news (they have explicitly stated they won’t so I’m not exactly going out on a limb with that prediction). Likely, if it is confirmed that Assad indeed used chemical weapons, the U.S. and its allies would for the first time supply military aid to the opposition. NATO and strategic allies in the Middle-East would likely take up the majority of any ground forces deployed.

It will be interesting to see how this recent news plays out. The Syrian civil war has been stuck in a “hurting stalemate”, perpetuating a humanitarian crisis and causing regional instability. It appears that there may finally be evidence that demands multilateral international intervention that ultimately ends the war.

And when the war does end, a whole new host of issues will emerge…

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Conflict Watch: Arm the “Good Guys”, Disarm the “Bad Guys”

On April second, the U.N. passed a historic Arms Trade Treaty:

“The U.N. assembly voted 154 in favor of the treaty, three against and 23 abstentions (U.N. officials said the actual vote should have been 155-3-22; Angola was recorded as having abstained, though it had attempted to vote yes.) Iran, Syria and North Korea cast the sole votes against the treaty.

Major arms producers China and Russia joined Bolivia, Nicaragua and India — the world’s largest importer of arms — in abstaining. Significantly, the United States reversed its decades-long policy of opposition to such measures and voted in favor of the treaty.”

There are questions as to whether the vote will pass the senate, as the gun lobby in America is expected to fight it tooth and nail (even though a direct stipulation of Obama’s support was that the treaty would not undermine second amendment rights, but the gun lobby in this country has proven itself to be amazingly resilient to facts and policy wording).

The treaty centers on human rights abuses. It requires arms deals to be reviewed based on the recipient of the weapons. If the recipient has a questionable human rights background, or there is any evidence the weapons may be used to perpetuate human rights violations, the deal will be deemed in violation of the treaty.

Regardless of U.S. passage, the treaty is a good thing. The U.S. has proven to be quite reserved with its weapons sales to questionable recipients, evidenced by the fact that we still will not provide arms to the Syrian opposition. “’We [the U.S.] license all imports and all exports of weapons, and we monitor where they’re coming from and who they’re going to when we’re in the business of exporting them externally.’

In a sense, the treaty attempts to bring the rest of the world up to this “gold standard” of trade control.”

While it would certainly strengthen the treaty to have the world’s largest arms exporter on board, it is not a make or break vote. If the NRA and gun lobby in America really want to throw their support behind Iran, Syria, and North Korea, so be it—it would truly highlight how backwards and irrational such organizations are.    

Syria is in a civil war, and North Korea has regularly threatened nuclear strikes on America and its allies. Iran is a suspected hub for destabilizing arms trade throughout the African continent. The fact that these 3 countries are the only ones who voted no to the treaty should tell you something about the level of support the treaty has globally.

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This effort to take weapons out of the hands of “bad guys” has been bolstered by America’s decision to sell weapons to the “good guys”:

“The Defense Department is expected to finalize a $10 billion arms deal with Israel, Saudi Arabia and the United Arab Emirates next week that will provide missiles, warplanes and troop transports to help them counter any future threat from Iran.”

“The objective, one senior administration official said, was “not just to boost Israel’s capabilities, but also to boost the capabilities of our Persian Gulf partners so they, too, would be able to address the Iranian threat — and also provide a greater network of coordinated assets around the region to handle a range of contingencies.”

Those other security risks, officials said, include the roiling civil war in Syria — a country with chemical weapons that could be used by the Assad government or seized by rebels — and militant violence in the Sinai Peninsula.”

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The U.S. has bolstered its military capacity in Asia and put pressure on China to counter the North Korean threat. It has signed the UN ATT in an attempt to help keep arms out of the hands of human rights violators and terrorists. It has doubled down on its strategic presence in the Middle-East by further arming its allies in the region.

The U.S. arms deal with Israel, Saudi Arabia and the United Arab Emirates may also be an attempt to show how the treaty works, based on its timing. Weapons manufacturers need not fear that their sales will drop due to the treaty—as long as weapons are going to responsible recipients, the treaty has been in no way violated.  

I like this two sided approach to helping ensure global security. The shortcomings of overt military action have been highlighted by “the war on terror”. America must rely on its strategic allies, as well as Europe, in order to ensure global security in a financially sustainable way—the U.S. simply cannot afford to continue playing “Team America, World Police”.

Obama has continued to impress with his foreign affairs record. He is following Teddy Roosevelt’s famous words “speak softly, and carry a big stick”, with the added provision that he will also supply big sticks to America’s allies and do his best to take big sticks away from our enemies.

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Conflict Watch: The Obama Ultimatum


To say North Korea’s recent actions and rhetoric have been anti-American would be an understatement. Within the past few months Kim Jong-Un has launched a nuclear test strike, cutoff phone lines with the U.S. and South Korea, barred South Korean workers from entering an industrial complex bordering the two Koreas, stepped up its military capacity, suggested countries shut down their North Korean embassies for the safety of their diplomats, and vowed nuclear strikes on the U.S. and its allies.

Much of this is just tough rhetoric, a young leader trying to show he can “rule with an iron fist”, that he is able to rebuff “western interests”, and will not have his national sovereignty challenged.

Experts agree that North Korea could not strike the U.S. mainland with nuclear weapons. More immediately at risk would be South Korea, Japan, and other pacific island allied states. This is alarming for the U.S. as well, who operates a close to 30,000 troop force in South Korea. South Korean has responded with it’s own stern warnings to North Korea, that it will “strike back quickly” if the North attacks. Japan has recently begun ramping up its military capabilities partially in response to North Korean rhetoric. Factor in China’s proposed military expansion, and we have a full blown arms race in Asia.

This is not an issue of China versus Japan, as both sides are essentially on the same side. The Chinese government has recently expressed dismay towards its allies in Pyongyang, agreeing in principle to tougher U.N. sanctions after North Korea’s most recent nuclear test strike.

The U.S., seizing onto this opportunity, has proposed what I call “the Obama ultimatum”:

“The Obama administration, detecting what it sees as a shift in decades of Chinese support for North Korea, is pressuring China’s new president, Xi Jinping, to crack down on the regime in Pyongyang or face a heightened American military presence in its region.”

“’The timing of this is important,’ Tom Donilon, Mr. Obama’s national security adviser, said in an interview. ‘It will be an important early exercise between the United States and China, early in the term of Xi Jinping and early in the second term of President Obama.’”

“In Beijing, officials said Mr. Kerry also wants to reinvigorate the dialogue with China on climate change… A week after Mr. Kerry’s visit, Gen. Martin E. Dempsey, the chairman of the Joint Chiefs of Staff, will spend four days in China to try to improve communication between the American and Chinese militaries.”

“’What we have seen is a subtle change in Chinese thinking,’ Kurt M. Campbell, a former assistant secretary of state for East Asian affairs, said in a speech Thursday at the Johns Hopkins School of Advanced International Studies. The Chinese now believe North Korea’s actions are “antithetical” to their national security interests, he said.”

This article seizes on many issues brought up at Normative Narratives involving U.S. and Chinese cooperation on issues concerning the “global commons” (environmental, security, etc.). It also highlights the potential for closer Washington-Beijing relations as two supposedly progressive leaders take the helm of the first and second largest economies in the world.

But there are some issues holding back U.S.-Chinese relations. Issues of trust between the two superpowers exist; cyber-attack accusations have flown from both governments in recent months. Also, there are factions within China who believe it is in China’s best interest to have an anti-Western power in the Korean Peninsula. Some believe that if China came down hard on North Korea, even so far as to push for a reunification of the Korean Peninsula at some point in the future, this would bolster U.S. influence in the region and diminish Chinese influence.

And it is exactly because of this point that I like “the Obama ultimatum”. If China’s greatest fear is increased American military capacity in the Asian Pacific, Obama has just offered Xi Jinping a surefire way to check U.S. military capacity in the region.

Obama has essentially put the ball in Jinping’s court. The next move belongs to China. Will they rebuff the American offer in an attempt to show solidarity with North Korea and protect the interest of “national sovereignty”?

It makes little sense to think they would; when you consider the growth and development of China, there is no question as to which country, between the U.S. and North Korea, is a more important partner. Factoring in Japan’s stance and it makes little economic or military sense for China not to align itself with “western interests”.

Nothing should be taken for granted; historically nations have been known to do things against their economic interests in the pursuit of strengthening their political ideology. But in today’s globalized economy, where the political economy intersection is so prevalent in mainstream political thinking, it would be very surprising to see China not at least attempt to comply with Obama’s offer.

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Economic Outlook: The (Unsuprisingly) Dismal Jobs Report

The jobs report for March came out today, and it was not pretty:

“American employers increased their payrolls by 88,000 last month, compared with 268,000 in February, according to a Labor Department report released Friday. It was the slowest pace of growth since last June, and less than half of what economists had expected.”

“The unemployment rate, which comes from a different survey, ticked down to 7.6 percent in March, from 7.7 percent, but for an unwelcome reason: more people dropped out of the labor force, rather than more got jobs.

The labor force participation rate has not been this low — 63.3 percent — since 1979, a time when women were less likely to be working. Baby boomer retirements may account for part of the slide, but discouragement about job prospects in a mediocre economy still seems to be playing a large role, economists say.”

There are a number of reasons for this dismal jobs report. The most obvious explanation would be the sequester, but this is incorrect. The sequester has not had enough time to work its way through the economy enough to significantly affect unemployment–most economists agree unemployment will spike at the end of the year due to the sequester. The payroll tax holiday expiration is a more plausible cause; part of the “fiscal cliff” deal, the tax increase disproportionately hit low income American’s disposable income starting in January. Both policies compromise aggregate demand (the payroll tax through consumption, sequester through government spending), reducing any incentive businesses might  otherwise have to increase hiring.

 Is it surprising we have had stagnant growth and stubbornly high unemployment given the current conditions? Any economist who understands basic macroeconomics could have predicted the growth-recession that has come to define post-Great Recession America, given the current global economic environment and political gridlock here at home. Paul Krugman, who always seems to focus on the most pertinent indicators and explain complex economic issues in an accessible way, does it again:

“But is this really a surprise? I mean, it’s true that the incipient housing recovery has made many people somewhat optimistic — I’ve been one of them — but when all is said and done, we are following strongly contractionary fiscal policy in an economy in which monetary policy is still ineffective because of the zero lower bound. How contractionary? Look at CBO’s estimates of the cyclically adjusted budget deficit (third column):”

” That deficit has declined from 5.6 percent of potential GDP in 2011 to 2.5 percent in 2013 — that’s 3 percent of GDP, which is a lot of austerity. Not all of that cut has even hit yet — the sequester isn’t in the macro numbers yet — but the rise in the payroll tax is very clearly driving the latest bad numbers, which show big declines in retail.

This is really stupid; as long as we’re at the zero lower bound, austerity is a huge mistake.”

Driving most of this deficit is lower budget revenues, a legacy of the G.O.P.’s failed “starve the beast” theory of governance.

But enough finger pointing. The real issue here is how much austerity has been pushed through (3% of GDP) at a time when the private sector cannot make up the slack of reduced government spending (what the zero lower bound essentially means, that even at a 0% interest rate, the private sector still cannot provide enough capital for the economy to run at full capacity).

How far from full capacity are we? According to the CBO, America has produced under capacity by a large margin since  2009 (-6.8% in ’10, -6.2% in ’11, -5.7% in ’12 and an estimated -5.9% this year). If we multiply those numbers by the GDP of those years, we get this much lost output: $896.24 billion in ’10, $883.28 billion,$ 779.19 billion in  2012. That’s a whopping 2.558 trillion dollars over the last 3 years. If the U.S. government had captured 20% of that in tax revenue, that would’ve been an additional $511 billion in revenue over those 3 years (actually, these numbers are an underestimation, as the GDP gap is based off potential GDP I used real GDP).

Also alarming is that the 2013 projected output gap is supposed to go up, from 5.7% in 2012 to 5.9% in 2013. Not only is our economy recovering, austerity measures are actually pushing the economy in the wrong direction.

There is a large cost to both the government and the people with so much idle production capacity. The government has to pay more benefits and receives less tax revenue, exacerbating the federal deficit. People are sitting idle, their skills are deteriorating, not to mention the psychological effects of long term unemployment.

Once you correct for these automatic stabilizers, the U.S. is basically on a stable fiscal path. Automatic stabilizers are cyclical, they do not have to be addressed by policy as they adjust automatically based on the economy. Low revenue from inadequate taxation is structural, and requires tax reform. Spending on social programs and government employment did not get us into our current problem, and cutting these programs will not get us out of it–it will actually dig us into a deeper hole.

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