Structural Reform and Economic Sustenance in European Austerity

Speaking at the World Economic Forum in Davos, Switzerland on January 25, 2013, Mario Draghi, president of the European Central Bank(ECB), said the bank’s program to buy the bonds of heavily indebted E.U. states had been “very helpful” in reducing the perception that the euro was on the verge of collapse. He also pointed to the structural reforms that heavily indebted states had enacted as “now bearing fruit.”[1] He urged those governments to continue to implement structural reforms so those states could take advantage of the ECB’s low interest rates and easy credit to banks. In short, the strategy of the ECB was to use monetary policy as leverage for long-term-oriented structural reforms at the state level. Political risk analysts listening to the central bank official likely came away with a more optimistic stance on the long term prospects for the E.U. economy.

Even though the progress achieved already on the debt crisis provided “light at the end of the tunnel,” the matter of structural reforms at the state level was subject to politics and was thus more uncertain. Also, economic conditions could worsen, hence making it politically and economically more difficult to make the needed structural changes. Chancellor Angela Merkel of the state of Germany warned the governors of heavily-indebted states such as Greece and Spain against the impulse to reduce the pace of structural reform in the face of economic stagnation. She pointed to the record unemployment numbers announced in Spain on January 24, 2013 as fodder for the anti-austerity political forces there. She further observed that “experience tells us that often pressure is required to enable structural reform.” The obstacles could have come from political officials or bureaucrats at the state level, and even from the people, upset at the economic austerity cut-backs hitting themselves and even the poor who depend on funding for sustenance. Advocates for those people were doubtlessly contesting that survival in the short run should not be sacrificed for long-term structural reform. 
Interestingly, making a qualitative (i.e., difference in kind) distinction between government programs that keep people alive on a daily basis and all the other budget items could actually permit more budget cutting because so much would be found to be subject to cuts without risking lives. In the U.S. at least, the qualitative difference has typically been made between domestic and military spending. This dichotomy has enabled huge increases to military programs even as cuts to food assistance have been proposed. Of course, the unemployment caused by a cancelled defense contract could put people in danger of losing their house or going without food. However, such individuals would be covered by the continuance of the programs providing sustenance as long as they were held apart from the other spending categories. Having an indirect effect on sustenance, such as military contracts can, does not render a particular budget item itself in the category of vital programs for sustenance, such as building more halfway houses for the mentally ill who are homeless.  This reflects the American culture more, wherein much more is deemed conditional than in Europe, where the principle of solidarity has been and is still more salient politically.
In short, long-term fiscal reform need not be at the expense of people eating and having shelter as well as medical care. Based on the firm foundation of human rights, programs primarily geared to sustenance can be isolated and protected such that the structural reform can be implemented more smoothly. Buffering sustenance programs from the massive cuts everywhere else would significantly reduce the vehemence of the protests and soothe the path of structural reform by isolating the entrenched officials and bureaucrats as the only primary obstructionists. 

See also Essays on the E.U. Political Economy, available at Amazon.  

1. “Davos: ECB’s Draghi Says ‘Real’ Economy Still Stagnant,” Deutsche Welle, January 25, 2013.

President Obama's Proposal to Rescue States: Unattended Problems in American Federalism and Human Sustenance

In 2011, President Obama proposed "to ride to the rescue of states" that had borrowed billions of dollars from the federal government to continue to pay unemployment benefits during the economic downturn. His plan was to "give the states a two-year breather before automatic tax increases would hit employers, and before states would have to start paying interest on the loans." Many of the states had begun the recession with "too little money in their unemployment trust funds'" Those states "quickly ran through what little they had as unemployment rose and remained stubbornly high month after month. With their own trust funds depleted, 30 states borrowed $42 billion from the federal government to continue paying unemployment benefits." These states were facing an estimated $1.3 billion in interest payments to Washington due in the fall of 2011. The President’s proposal also included raising the minimum taxable wage base from $7,000 to $15,000 in 2014. "The rate of the federal portion of the unemployment taxes would then be lowered, so the proposal would not raise federal taxes on states that do not owe the federal government money. But it would speed the rate at which states that do owe money repay the federal government, and allow states to collect more unemployment taxes to rebuild their trust funds if they do not lower their tax rates." By February, 2011, eighteen states had already raised their minimum taxable wage base to $15,000 or more, according to the National Association of State Workforce Agencies. Iris Lav, an adviser at the Center on Budget and Policy Priorities, said that the unemployment system was “a constellation of problems" that needed to be solved." She added that the near-term problem was the economy, and "both the interest payments and the principal repayments are [were] cutting into employers, and it [made] great sense to postpone them." The larger question was how to "get states to solvency.”[1]

Analysis of the proposal:

The proposal itself makes sense from the standpoint of getting thirty states out of a tight fix at the time. The debate on whether taxes should go up in 2011 or 2014 was less important than attention to the larger structural fault-lines, which are only hinted at in the President's proposal to ease up on States in debt at the time due to their participation in the unemployment compensation system. To be sure, it is important to note that having extended the length of unemployment-compensation's term to cover the length of the recession following the financial crisis of 2008 required either higher taxes or more debt. Both Reagan's and (George W) Bush's tax cuts had not paid for themselves, so a tax cut, especially during the severe recession, would not have covered the bill. What is good for people and companies facing high tax bills is not necessarily in the public good, and thus good public policy. Even so, I want to stress the larger structural fault-lines that are implicit in the President's proposal, for subterranean tensions rarely reach the surface of a society's consciousness. 

First, under the proposal, the "rescue" was to be limited to the states' respective debt from paying unemployment compensation; neither the Federal Reserve nor the U.S. Government would have been able to come to the rescue of the states concerning their entire deficits and debt. In fact, due to the "crowding out" tax effect, the more that the U.S. Government takes in, the less the state governments can politically raise taxes to cover their respective deficits and debts. Moreover, implicit in the notion of coming to the rescue of is the dependence or lower position of the rescued. In a viable federal system, neither the federal government nor state governments is subservient to the other, for otherwise both could not serve in the systematic role as a check on power. 
Perhaps the "cooperation," or intermixing, of the two government systems (that of the states and that of the federation) in the unemployment system is problematic because it gives the U.S. Government a way to dominate the states. According to Jacobs and Karst, “It is the preservation of the balance between the central authority and the constituent states that is the essence of federalism.” Yet, “[i]n the American federal structure the central authority is stronger."[2] Rescuing thirty states attests to the overweening power of the federal head, and thus the imbalance that is so problematic in the long term to a federal system of checks and balances.[3] 
Ken Wheare claimed in his text, Federal Government, that maintaining at least one autonomous domain for the states is sufficient for a viable federal system of dual-sovereignty. I disagree; a state with one power and otherwise "surrounded" by a federal government with many is not de facto semi-sovereign even if so de jure. In his text, Wheare's statement is utterly inconsistent with his other contention that the two systems of government in a federal system must be able to act as a check on each other. Balance is simply not possible if the state governments have only one or even a few areas of sovereignty whereas the federal government has many and can even pre-empt states from legislating in an area in which the federal legislature has no intent to play an active role legislatively!
To the extent that President Obama's proposal was debated in terms of rescuing the thirty states and whether to raise taxes in 2011 or 2014, the discourse failed the opportunity to include the broader questions pertaining to what is necessary to preserve the American federal system; the superficial debate meant blindly sitting by once again while the political consolidation of a diverse continent proceeded full throttle ahead to a "one size fits all" federation.  The building pressure from the unaccommodated natural diversities would go on, likely to explode one day. 

Second, the fitness of the unemployment-compensation system itself, being limited to helping the unemployed for discreet periods often shorter than a recession, is not touched on in the proposal. For instance, the X-weeks limit of compensation as the program's default could have been addressed, as it treats "convenient" things like food, rent and utilities as though they were optional commodities that could be skipped after the Xth week on unemployment-compensation. In short, the matter of necessities being conditional warranted debate because of the underlying assumption that the very survival of a human being is (or should be) conditional. Doubtless it is in Hobbes' state of nature, but even he accepts a right of self-preservation even under a Leviathan. In other words, the natural urge to preserve oneself is not conditional, so a conditional government program covering basics is not natural or in sync with human beings.  
Relying exclusively on business to bring an economy to full employment is problematic in that that goal has rarely been achieved anywhere without government to pick up the slack. From the standpoint of survival as a human right, laissez-faire economics is thus insufficient. To be sure, the recognition of survival as a human right, as is the case in the E.U., requires higher taxes than are necessary in simply treating survival as a conditional matter. This broader debate and thus the broader fault-line are typically ignored as Americans debate incremental or temporary changes in legislative or executive proposals bearing on public policy.

1. Michael Cooper and Sheryl Stolberg, "Obama Plans to Rescue States with Debt Burdens," The New York Times, February 8, 2011.
2. Jacobs, Francis G. and Kenneth L. Karst, “The 'Federal' Legal Order: The U.S.A. And Europe Compared A Juridical Perspective,” in Integration Through Law: Europe and the American Federal Experience, Mauro Cappelletti, Monica Seccombe, and Joseph Weiler, eds., Vol. 1, Methods, Tools and Institutions. Bk. 1, “A Political, Legal and Economic Overview” (Berlin: Walter de Gruyter, 1986), pp. 169-244, p. 171.
3. Skip Worden, Essays on Two Federal Systems: Comparing the E.U. and U.S., and American and European Federalism: A Critique of Rick Perry's "Fed Up!" 

Is Modest Growth vs. Full Employment a False Dichotomy?

As Summer slid into Autumn in 2012, the Chinese government was giving no hint of any ensuing economic stimulus program. This was more than slightly unnerving for some, as a recent manufacturing survey had slumped more than expected, to 49.2 in August. A score of 50 separated expansion from contraction. A similar survey, by HSBC, came in at 47.6, down from 49.3 the previous month. Bloomberg suggested that China might face a recession in the third quarter. So why no stimulus announcement?  Was the Chinese government really just one giant tease? I submit that the false dichotomy of moderate economic growth and full employment was in play. In short, the Chinese government did not want to over-heat even a stagnant economy even though the assumption was that full employment would thus not be realizable.

Wang Tao, an economist at UBS, explained the “very reactionary, cautious approach” as being motivated by the desire to avoid repeating the “excesses of last time.”[1] The stimulus policy in the wake of the 2008 global downturn had sparked inflation and caused a housing bubble in China. According to The New York Times, China was avoiding “measures that could reignite another investment binge of the sort that sent prices for property and other assets soaring in 2009 and 2010.”[2] A repeat of any such binge could not be good, for it can spark the sort of irrational excitement that have a life of its own.
In short, too much stimulus in an economy can cause inflation and put people’s homes at risk of foreclosure once the housing bubble bursts, whereas a lack of stimulus means that a moderate growth rate is likely, rather one that could give rise to full employment. Is there no way out of this trade-off? 
Keeping fiscal or monetary stimulus within projections of a moderate growth can occur with more government spending targeted to a combination of giving private employers a financial incentive to hire more people and increasing the number of people hired by state enterprises. In principle with the Full Employment Act of the U.S. in 1946, a government can see that anyone who wants a job has one, while still maintaining a moderate stimulus. A modest growth-rate can co-exist with full employment. 

1, Bettina Wassener, “As Growth Flags, China Shies From Stimulus,” The New York Times, September 3, 2012. 
2. Ibid.

Luring Business: “Job Creators” in Texas

As of December 2012, Texas was giving out more financial incentives—mainly in the form of tax breaks and subsidies—to business than was any other American state. The government was handing out around $19 billion annually, while at least $80 million was being spent in the U.S. overall, according to the New York Times. Although at the time Texas had half of all the private-sector jobs created in the U.S. during the preceding decade, the Times points to “a more complicated reality behind the flood of incentives.” It cannot simply be assumed that good jobs will be created.

For example, Texas had the third-highest proportion of hourly jobs paying at or below minimum wage. In fact, Texas had the 11^th-highest poverty rate in the union. “While economic development is the mantra of most officials, there’s a question of when does economic development end and corporate welfare begin,” Dale Craymer of the Texas Taxpayers and Research Association said. In other words, one might ask how much the benefits from the financial incentive extend beyond the recipients themselves to the general public and Texas. Even though businesses cite “job creation” as a benefit of government help, one might ask what kind of job as well as how many?

That the government may have been relying on the businesses themselves or their “consultants” even as they would stand to gain suggests that a conflict of interest may have blurred the line between decision-maker and beneficiary. Indeed, political contributions from companies to re-election campaigns may have exacerbated the problem.

For example, Brint Ryan, a tax consultant specializing in finding incentives for large companies, was “a familiar presence at the state comptroller’s office . . . which must sign off on many tax breaks”—potentially blurring the line between beneficiary (agent) and decision-maker. He also donated $250,000 to Gov. Rick Perry’s ill-fated run for the White House. Texas had been largely bereft of financial incentives for big business when Perry became the head of state in 2001. He had smarted when Texas lost out to Illinois on a new Boeing plant and he was not going to repeat that mistake. Years later, he could point to expansions by Facebook, eBay and Apple in Texas. “They’re coming because it is given, it is covenant, in these boardrooms across America, that our tax structure, regulatory climate and legal environment are very positive to those businesses,” he said. This does not mean, however, that they deliver on well-paying jobs for Texans. There is also the opportunity cost to the government. As Texas spent more to lure big business, the education budget took a hit. Brint Ryan may have had Gov. Perry’s ear when students and even the poor probably did not.

In short, government officials engaged in industrial policy would be wise to distinguish corporate welfare from “economic stimulus.” The influence of money in the American political system doubtless created a conflict of interest blurring the line between the beneficiaries and the decision-makers. The temptation for policy makers might therefore be to lapse into corporate welfare at the expense of basic services. CEOs who are looking for financial incentives from the government as a way to make more money may claim that their respective companies are “job creators,” but the reality is that those companies are “profit creators” with jobs being a byproduct of sorts. The case of Texas suggests that market equilibrium may naturally be well short of full-employment. If so, government officials should not go overboard with the financial incentives in the mistaken belief that some full-employment market utopia is possible, even if providing corporate welfare does not hurt their own political welfare either.

Source:

Louise Story, “Lines Blur as Texas Gives Industries a Bonanza,” The New York Times, December 3, 2012.  

Questioning Universal Basic Income

The gist of basic income is that a government “distributes cash universally. As the logic runs, if everyone gets money—rich and poor, the employed and the jobless—it removes the stigma of traditional welfare schemes while ensuring sustenance for all.”[1] The “logic,” I submit, is flawed even if the basic idea is solid.

The notion of a basic income sprung from the desire to “reimagine capitalism to more justly distribute its gains.”[2] Justice here translates into the ideological belief that sustenance itself is a basic human right, and thus should be guaranteed to everyone. The obligation of government follows from this right. Interestingly, the laissez-faire economist, Milton Friedman, “embraced the idea of negative income taxes that put cash in the hands of the poorest people.”[3] But as the poorest may not fill out tax returns, cash payments by governments may more fully realize the objective of a basic income-floor (i.e., no one gets less than the floor-amount).

I submit that just as making sure that every adult has the basic, or floor, income, the notion of such a floor does not justify a government giving cash to everyone—rich or poor, employed or jobless. Adults whose income already exceeds the income-floor do not need additional income to get up to the floor, for such people are already above it. As for the stigma of welfare, which is very real in states like Arizona, the notion of a basic income can appeal to people whose income is above the floor, for they would be free of the anxiety of possibly falling through the cracks of a checkered social net should even a high income end amid continued high expenses. In the wake of the financial crisis of 2008, for instance, many people whose income exceeded a basic floor oriented to sustenance lost their homes when they went under water as real estate markets collapsed—especially in Florida and California.

Orienting the give-out of cash only to adults whose existing income is zero or otherwise below an established floor (i.e., a floor sufficient that sustenance can be achieved) would render such a program more fiscally stable. Whereas Stockton, California, began a test program in 2018 whereby 100 families would get only $500 a month—an amount clearly below sustenance—the requirement of a full-fledged program wherein only adults below the floor would get cash could more easily afford to set a floor that truly allows for substance.  Then nobody, rich or poor, would have to fear not being able to survive.

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1. Peter S. Goodman, “Inequality? California City Is First in U.S. to Try,” The New York Times, May 30, 2018.

2. Ibid.

3. Ibid.

Losing the Middle Class: An Educational-Industrial Policy

Beneath the headlines showing new figures on unemployment (which do not include the unemployed who are no longer looking for work or applying for unemployment compensation) is the story of the changing distribution of jobs in the American economy. That distribution in turn can give rise to cultural or societal changes. When the jobs in the economic middle are disproportionately lost, American society increasingly resembles a tale of two cities—and by this I do not mean Augustine’s heavenly and earthly cities though the realms of the “haves” and “have nots” could admittedly be called as such by materialists.

According to CNBC, a “report looked at 366 occupations tracked by the Labor Department and clumped them into three equal groups by wage, with each representing a third of American employment in 2008. The middle third — occupations in fields like construction, manufacturing and information, with median hourly wages of $13.84 to $21.13 — accounted for 60 percent of job losses from the beginning of 2008 to early 2010.” The job market turned around since then, but those fields represented only 22 percent of total job growth. “Higher-wage occupations — those with a median wage of $21.14 to $54.55 — represented 19 percent of job losses when employment was falling, and 20 percent of job gains when employment began growing again. Lower-wage occupations, with median hourly wages of $7.69 to $13.83, accounted for 21 percent of job losses during the retraction. Since employment started expanding, they have accounted for 58 percent of all job growth. The occupations with the fastest growth were retail sales (at a median wage of $10.97 an hour) and food preparation workers ($9.04 an hour).” By mid 2012, each category had grown by more than 300,000 workers since June 2009.

Essentially, the job expansion in the wake of the 2008 recession proceeded on two fronts—the high and low ends, rather than in the middle. Microsoft, Google, and Facebook represent high-end employers, while McDonalds, Walmart, and Starbucks hire at the lower end. The wealthy increasingly shopped at Whole Foods while the service industry employees bought their food at Walmart. This rendering is of course simplistic, but separation of two distinct cultures based on wealth is clear as gated communities were becoming increasingly popular among the upper middle-class and the rich in the first decade of the twenty-first century.

In terms of education, the wealthy can send their kids to an Ivy League college, while the pro-profit colleges give a training-based inferior education to the service employees. In actuality, those employees are being trained rather than educated. The lack of education can be seen by the reliance on scripts for employees at many retail establishments. The unthinking herd mentality can be observed from the ubiquitous “have a good one!” which is grammatically incorrect and generally vacuous in meaning. A good what? The antecedent is never specified. The sheer reliance on scripts suggests that were the customers to gleam the true condition of the employees, there would be shock and awe, as in, how could we as a society have so failed the younger generation? Put another way, the centralized training of the chains (we are born free but chained to the culture invented by retail) supplants the education (not training!) that every young person should have. The eclipse of the value of education is a salient though invisible feature of the earthly city, while the inhabitants of the heavenly city make sure that their kids are well-educated. In the earthly city, the blind are leading the blind, and nobody believes he or she can be wrong. Yet how different is the actual condition on the ground!

In the post-industrial society, government policy can emphasize education for the masses, such that the higher-end vocations are “filled to the brim” and the lower-end jobs minimized. The United States can and should orient its citizenry to areas of comparative advantage rather than simply relying on the labor market to assign the distribution of jobs. For example, after its import-substitution policy, India stressed “home grown” computer science and engineering vocations in line with the view of G.D. Birla and J.N. Tata that British India needed to replicate British industry rather than be dependent on it (Gandhi opposed this strategy). In the United States of the twenty-first century, expanding excess to college and university education that is not immediately eclipsed by training would ironically enable people entering the workforce for the first time to go into the higher-end professions. In short, America needs an industrial policy that highlights education such that the upper- and middle-income professions expand proportionately at the expense of the lower-end jobs.

Source:

Catherine Rampell, “Majority of New Jobs Pay Low Wages, Study Finds,” The New York Times, August 31, 2012.

On the State of the (American) Union: Getting Real

It is certainly more politic to declare the state of the union to be strong rather than weak. In his State of the Union speech in January 2011, President Obama ended by stating definitively, "The state of the union is strong." Even though particulars could doubtless be found to support his claim, I contend that he severely understated the weakness in the state of the union at the time.

The $45 billion deficit in the Social Security fund ought to have raised more than a few eyebrows, not to mention the U.S. Government deficit of over $1 trillion and the related debt of $14.3 trillion. To claim strength as if the U.S. were still a going concern as long as such a debt exists is more fitting for a magician than a U.S. President. Furthermore, one could point to the 3.4 million inhabitants expected to be foreclosed by the end of 2011 or the 9.7 million unemployed on unemployment compensation in January, 2011 (51,000 added the last week of January alone), as well as to the 40 million inhabitants within the U.S. still without health insurance (i.e., having to wait until 2014 because of a deal made with the insurance company lobby--a party with a vested financial interest).

The President's State of the Union speech evinces a state of denial going far beyond one man. One might ask, moreover, whether structural or systemic solutions are even possible in a representative democracy, or is the free world destined to be poll- and issue-driven? Furthermore, are we too fixated on the status quo wherein we prioritize our debate on the size and involvement of government (e.g., tax increases vs. spending or tax cuts, rather more revenue and less spending) over the immediately pressing exigency of fiscal balance and the human rights of the least well off (John Rawls' criterion for a just outcome)? Are we destined to have solutions foisted on us by the brute force of necessity? In short, can we bracket our incremental approach based on convenience and think instead about the long-term viability of the system itself? The State of the Union of 2011 notwithstanding, the state of our union is worth taking another look.

Source:

David M. Herszehhorn, “Deficit Forecast Nears $1.5 Trillion, Fueling Partisan Battle on Federal Spending,” The New York Times, January 26, 2011.

When 4.3% Is below Full Employment

CNN reported that the U.S. economy added “a strong 209,000 jobs” in July of 2017, with the unemployment rate falling to 4.3% to match a 16-year low. Unemployment had peaked at 10% in 2010, after the financial crisis of 2008. CNN cited many economists as saying that the 4.3% rate was “at or near” full employment, meaning that the rate would not go down to a significant degree.[1] Yet even within CNN’s own reporting, we can find reason to doubt this claim.

The first indication is the mention of wage growth being sluggish. “Wages grew only 2.5% in July compared with a year earlier.”[2] Chris Gaffney, president of Everbank World Markets, noted at the time that questions remained about when a spike in wages would be seen. Were full employment at hand, shortages in the supply of labor would have been pushing the wages up appreciably.

The explanation lies in CNN’s reporting of a statement by Steve Rick, chief economist at CUNA Mutual, an insurance company. “There’s still lots of people coming back into the labor market, looking for jobs.”[3] With a significant number of people deciding to resume looking for jobs, the official unemployment rate of 4.3% understated the actual unemployment numbers, which includes people no longer filing for unemployment compensation or even simply applying for jobs. In other words, the actual unemployment rate was significantly higher, so even if 4.3% would have corresponded to full employment, the U.S. was not at full employment. Hence, wages were not spiking.

A problem with CNN erroneously reporting full employment involves the resultant impression by the American people and the elected representatives that nothing further in terms of public policy was needed to get the structurally unemployed back to work. Put another way, relying on the official unemployment rate risks settling for economies that have written off the long-term unemployed.

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[1] Patrick Gillespie, “Milestone for Trump: 1 Million New Jobs in Six Months,” CNN, August 4, 2017.

[2] Ibid.

[3] Ibid.

The Spanish Recovery: On the Roles of Budget Constraints and Exports

In 2007, the E.U. state of Spain “was hopelessly addicted to a credit-fueled construction boom that produced a shattering bust, leaving banks collapsing in the face of bad loans.”[1] A decade later, the state’s economy was “expanding at around 3 percent” over the previous year, “producing goods for export, generating jobs,” and pointing to possible E.U.-wide economic recovery.[2] The Spanish economy had returned to its pre-crisis size, according to the state’s government, yet the economy had not yet solidified a firm foundation and unemployment was still stubbornly high.

Although the credit-based building boom was doubtlessly not sustainable and fraught with risk, the ensuing budget austerity mandated at the federal level inhibited the state’s government from spending more money “on infrastructure projects to generate jobs.”[3] Contracting government spending exacerbates rather than ameliorates an economic downturn, even if deficits go up. The federal law on state deficits being at or below 3.5% of a state’s GDP did not have enough flexibility for the Spanish government to be able to minimize the period of the downturn. 

Hence, The New York Times concluded at the time of the recovery, “Spain’s resurgence is less cause for celebration than a grim reminder of how long it took.”[4] That is to say, the steep unemployment level, which had reached 25 percent, need not have endured as long as it did. Even in 2017, the unemployment rate remained above 18 percent (near 39 percent for the state’s youth).[5] 

It is difficult, therefore, to see even a return to the size of the economy before the debt-crisis as a recovery. To be sure, exports had grown “to close to one-third from about one-fourth of the economy,” and such an economic engine is clearly more stable than an over-leveraged construction-led economy.[6] An economy fueled by consumption-buying from within would be more stable still, however, and the stubbornly high unemployment rate attests to why such a solid foundation had not yet materialized. Even though the large SEAT auto-factory put €3.3 billion (about $3.8 billion) of new machinery into the operations, relying on one company for the surge in exports is not as solid as a diversified export-base.

To be sure, the increasing tax revenue in the state, albeit very modestly, enabled more money to flow back into the economy. Work on the long-planned expansion of the Barcelona subway system, a €6.8 billion project, had resumed. Yet such an infusion was needed especially during the crisis and in the ensuing years of extremely high unemployment.  The inflexible federal strictures of budget discipline did not allow for such counter-cyclical measures even in a rather extreme cyclical downturn.

Related: See Essays on the E.U. Political Economy, available in print and as an ebook at Amazon.com.

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[1] Peter S. Goodman, “Spain’s Long Economic Nightmare Is Finally Over,” The New York Times, July 28, 2017.

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Ibid.

Bringing Back Manufacturing Jobs to the U.S.A.: Confronting Tough Realities

Meeting with American corporate CEOs at the White House on the first “working day” of his presidency, Donald Trump warned, “A company that wants to fire all of its people in the United States and build some factory somewhere else, then thinks that product is going to just flow across the border into the United States . . . that’s just not going to happen.”[1] The new president was up against “tectonic forces” in trying to bring back “blue collar” manufacturing jobs to his base using tax policy. Yet the business calculus goes immediately on the basis of financial advantage, and the contours of the “game board” include the various tax and trade policies of countries.

Without an import tax of sufficient amount to render the cost savings of moving a factory abroad, CEOs will naturally succumb to the pressure “to increase earnings at a double-digit rate when the American economy is growing by only 2 percent, and the quickest way to deliver higher profits is by reducing labor costs, whether through automation or moving jobs to cheaper locales like Mexico or China.”[2] The push, in other words, is excessive. The cause, according to the New York Times, “is the drive for bigger returns on 401(k) accounts, pension plans and other retirement vehicles that depend on steadily rising corporate profits and, in turn, a buoyant stock market.”[3] Whereas a U.S. president has a term of four years in which to see his policies realized, no such time-span is permitted where quarterly earnings reports are all the rage. Simply put, CEOs must make sure their policies see results and quick. With many emerging-market economies, as well as China, growing at more than twice the rate of the U.S. at the time Trump took office, global—including American—capital takes flight.

It is not as though the CEO’s of American companies who move factories off-shore are unethical. Scott Paul of the Alliance for American Manufacturing, told the New York Times, “I believe a lot of the C.E.O.s in that room [with Trump] want to do the right thing and create jobs in America, but the realities of Wall Street Pressure and a globalized economy leads [those C.E.O.s] to off-shore a lot of these jobs.”[4] One way to align the patriotic value with the business calculus is to alter the “game board” in such a way that it would be cheaper for the companies to manufacture products geared for domestic sale domestically rather than abroad; products directed to the Chinese consumer could still be manufactured in China. The key lies in raising the tariff or tax high enough and in adequately enforcing it. 

To be sure, automation would still mean that a return to the manufacturing hay-days could not be expected. Herein lies a much more difficult challenge: what to do with the remaining blue-collar workers who are not oriented to moving to white-collar professions and yet cannot find jobs in manufacturing. Behind the legitimacy of a tax on American companies moving factories abroad is the hard truth that significant numbers of people in any geographical region are not going to fit into white-collar jobs, for a variety of reasons not limited to education and upbringing as well as values.

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[1] Nelson D. Schwartz and Alan Rappeport, “Call to Create Jobs, or Else, Tests Trump’s Sway,” The New York Times, January 24, 2017.

[2] Ibid.

[3] Ibid.

[4] Ibid.

Modern Day Mercantilism: Donald Trump Intervenes at Carrier

The tension between the free-market philosophy and mercantilism (e.g., an industrial policy) has been longstanding. I contend that the philosophy of international business (or international economics) is flawed terms of how far comparative advantage is applied, even at the expense of full employment at the city or country level. The case of Carrier in Indiana points to the legitimacy of government intervention even at the expense of comparative advantage.

A mix of ominous threats from Donald Trump as U.S. President-Elect, and enticing financial incentives worth $7 million from Indiana kept roughly 1000 out of 2000 jobs at Carrier, a unit of United Technologies, from being transferred to Mexico. The company had expected to save $65 million by relocating not only the fan coil manufacturing lines, which would still go, but also the lines that build medium- and high-efficiency gas furnaces, which would now stay in Indiana.[1] Carrier’s management must have factored in the likelihood of the upcoming Trump Administration and Republican Congress imposing steep tariffs on imports entering the United States from American companies that have moved production to other countries in order to take advantage of lower wages and comparatively lax regulations. In fact, Trump’s intervention with Carrier undoubtedly had the benefit of reminding other such company managements of the possible additional cost to manufacturing abroad and yet still having access to the huge American domestic market via importing (a tariff would make specific-company interventions unnecessary). So, the single-minded maximizing-profit calculus notwithstanding, we can understand why Carrier’s management agreed to take a bit—albeit just a bit—of a financial hit. “Every penny counts, but if we step back and I’m looking at earnings of $6.60 per share this year, 2 cents is an easy concession if the president-elect listens to some of the company’s bigger concerns,” noted Howard Rubel, a senior equity analyst at Jefferies.[2] The 2 cent per share reduction could in fact be offset (and more) by the possible redressing of such “bigger concerns,” especially if the company and its workers make politically strategic campaign contributions.

Unfortunately, pressures on company managements to focus on quarterly stock prices mean that assuming even a long-term profit-metric can be difficult. The allure of producing abroad and importing products back into the U.S. would likely continue; hence the rationale for a tariff. Lest it be feared that trade wars might be triggered, the companies subject to the tariff would be American rather than Chinese or European. Regarding the free-market alternative, the comparative-advantage philosophy of international business omits the practical need for manufacturing and low-skilled jobs in virtually any geographical area. Not everyone in a given population can be retrained to work in computer-tech industries, or educated to become CPAs, physicians, and lawyers. To say the U.S. (or E.U.) is a knowledge economy leaves a lot of people out—people who could be expected to be dependent on government benefits to live. Therefore, a mercantile government policy oriented to retaining a manufacturing sector makes sense for any government. The free-market logic applied to international economics is flawed because a sizable proportion of a country’s workforce cannot (or will not) be part of a “knowledge economy,” for instance. It also follows that not everyone is going to participate in a “manufacturing economy.” Geographically, economic diversity reflects the diverse makeup of the labor force. Put academically, the logic of international economics has its limits, or drawbacks, and so international political economy is a better, more realistic, approach.

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[1] Nelson Schwartz, “Trump Sealed Carrier Deal with Mix of Threat and Incentives,” The New York Times, December 1, 2016.

[2] Ibid.

Going to the Extreme for Economic Growth: Low Interest-Rates as Unfair and Unwise

Is moderate monetary policy better than going to the extremes? The same can be asked of fiscal policy. Moreover, is a hypertrophic urge to prompt economic growth as if it were an end in itself better than seeking an economic equilibrium? Generally speaking, systems in equilibrium are more stable than those that include a schizogenic, or limitlessly maximizing, variable. An example of the latter is the population growth of our species relative to the equilibria otherwise established by the ecosystems in which we live. A desire for economic growth is a maximizing variable in a political economy. So too is the related practice of taking monetary (and fiscal) policy to an extreme. If the desire is great enough and the related policies extreme enough, the equilibrium of a political economy can be punctured with systemic risk increasing as does the instability of the system. I contend, therefore, that moderate government and central bank policies are preferable to going to the extremes. Here, I address monetary policy.

As Raghuram Rajan stepped down on September 4, 2016 as India’s central banker, he warned the world—and especially the U.S. and E.U.— against keeping interest rates low as a way to encourage growth. He claimed that low interest rates globally could distort markets and are difficult to raise. Central bankers setting interest rates low to stimulate economic growth can become “trapped” out of fear that raising the rates would slow economic growth.[1] This is ultimately a defect of democracy itself—the inflicting of necessary “pain” on the electorate being very difficult politically. Hence, for example, the U.S. Federal Reserve Bank at the time was caught in its “long-running dilemma about whether the labor market [could] easily withstand another interest-rate increase” even though many policy makers believed that the economy was nearing full employment.[2] That the market nonetheless expected that the Fed would “push off a rate increase until December” demonstrates just how politically difficult raising rates can be even when they are extremely low and the economy is near full-employment.

Given such political sensitivity, Rajan urged central bankers and government officials not to use low interest rates as a substitute for “other instruments of policy” and ‘various kinds of reforms” that are needed to encourage growth; it is simply too difficult politically to increase such “good” rates.[3] Relying too much on one policy lever, moreover, is not wise because doing so could introduce a maximizing variable that could compromise the equilibrium of a political economy.

As one example of why going to extremes on monetary policy is not a good idea, Japan was issuing negative interest-rate bonds at the time, which some investors were actually buying. Such bonds do not pay interest, and the principal returned is less than that which the investor paid for the bond. Willing investors were betting that their purchases would stimulate other investors to buy, so the price of the bonds would go up (the original investors would then sell for a profit).

Yet another instance concerns companies in the E.U. that were issuing bonds with negative interest-rates. Investors were “paying for the privilege of lending their money to companies.”[4] This is clearly dysfunctional from a financial standpoint. Edward Farley, head of European corporate bonds at PGIM Fixed Income, said, “It seems pretty bizarre to ask a corporate to look after your money and give you back less in two or three years’ time.”[5] To be sure, the E.U.’s central bank had expanded its bond-buying to corporate debt over the previous summer, hence “creating more demand for bonds and pushing down their yields.”[6] This does not explain the investors’ bizarre behavior in buying bonds with negative interest-rates. Something else was behind the oddity; something was wrong, financially speaking. The Wall Street Journal makes the source of the problem explicit, noting at the time that the negative interest-rates were a “sign of how aggressive central-bank policy is upending conventional patterns in finance.”[7] We can substitute “extreme” for aggressive, and we have an explicit link between upending conventional behavior in finance and a central bank going to extreme measures.

Another example of a warping of finance concerns savings accounts. When the price of money reaches an extreme low, people have less incentive to put money into a savings account. Consumption is artificially stimulated while saving is discouraged. This imbalance can through off the equilibrium of a stable economy. Furthermore, it is not fair to penalize one sector of a financial system (i.e., savers) while making it easier for another sector (mortgage holders). Put another way, the efforts to stimulate economic growth should not be borne on one group in the economy while another group benefits.

In general, going to an extreme in monetary policy, such as when a government relies exclusively on low interest rates to spur economic growth, is not wise because setting a variable in the economy at an extreme can cause the economy to become distorted. This in turn can rip a tear in the economy’s equilibrium. The solution is not just to balance the use of monetary and fiscal policy; resisting the temptation to go to extremes in demanding economic growth may also be needed.

At that more fundamental level, achieving and sustaining an equilibrium at the macro level (i.e., the economy or political economy) should be valued more when monetary or fiscal policy is being pushed to extremes. At that level, societal values, rather than merely political platforms and central-bank policies, must be changed; otherwise, electorates will continue to pressure politicians and central bankers to do what they have to in order to get more economic growth. To be sure, voters want more jobs, and thus a growing economy, so the societal values that support the demand beyond that which is in keeping with maintaining equilibrium are not easily changed. I submit that the existing societal values in advanced economies lapse in failing to recognize that equilibrium is elastic within limits. So to a certain extent growth vs. equilibrium, or increase vs. balance is a false dichotomy.

To be sure, the economic growth that is in keeping with growing the existing equilibrium rather than piercing through it is not necessarily enough for full employment to be achieved. As per the U.S. Full Employment Act of 1946, governments may need to step in to fill the gap such that everyone who wants a job can have one, even if the government is the employer. Franklin Roosevelt understood this in the Great Depression of the 1930’s, so he instituted the CCC and other programs in his New Deal. With governments stepping up to the plate, voters might not insist that their elected representatives and their appointees in turn set monetary or fiscal policy to an extreme level in order to pump up an economy beyond an undistorted equilibrium. Like someone who tries too hard, pushing monetary or fiscal policy to an extreme may ultimately be worse economically than had the devices been used moderately.

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[1] Geeta Anand, “A Departing Central Banker’s Warning,” The New York Times, September 5, 2016.

[2] Eric Morath, “Jobs Data Cool Odds on Rate Rise,” The Wall Street Journal, September 3-4, 2016.

[3] Anand, “A Departing Central Banker’s Warning.”

[4] Christopher Whittall, “European Firms Borrow at Subzero Rates,” The Wall Street Journal, September 7, 2016.

[5] Ibid.

[6] Ibid.

[7] Ibid.

Budget Austerity in the E.U.: Turning the Russian Invasion of Ukraine into an Advantage

With economic growth in the E.U. flat-lining in mid-2014 after a modest recovery, pressure mounted to relax the federal "austerity" constraints on the state budgets. According to The New York Times at the time, "(p)olitical and financial instability related to Russia's confrontation with Ukraine and the effects of escalating economic sanctions between [the E.U.] and Russia have further clouded the economic outlook."[1] Mired in the austerity vs. fiscal stimulus dichotomy, E.U. leaders may have been missing an opportunity here.

With yet another round of sanctions in the works on the heels of a recent Russian invasion and unemployment at a stubborn 11.5 percent, and the threat of runaway deflation hitting wages in particular, the E.U.'s economy looked poised for an ongoing onslaught of stag-deflation. The E.U. "is menaced by long and possibly interminable stagnation if we don't act," Francois Hollande of the state of France warned.[2]  He had in mind some movement along the ongoing relaxation vs. austerity dichotomy in the direction of larger state deficits--something the governor over in Germany was still fiercely resisting. We "really must question whether we can go on receiving less than we spend, so that our debts keep on growing. Indeed," Angela Merkel pointed out, "a whole crisis of confidence has grown out of that."[3] Such a basic imbalance in state finance undercuts the equilibrium that is so vital to the survival of the macro system in the long run.

So, it would appear that the well-worn dichotomy had reached a dead-end, or the proverbial brick wall. I contend that in such a case thinking beyond the either/or strictures is advisable. To illustrate my point, I present a thought-experiment of sorts (i.e., unrealistic, but it gets the point across).

Let's imagine that the president of Ukraine met with the European Council as Russian troops were crossing the border into Ukraine with the eventual aim of separating the eastern half of the independent state from Kiev.

"I come before you with an admittedly unorthodox suggestion," President Poroshenko might have told the Council. "Without a massive infusion of support from the E.U., my country will split apart and Russia will gain the eastern half."

"What kind of support do you have in mind," the Council's Van Rompuy might has asked.

"Well, the sort that would make your fast-track accession process look like a snail's pace," Ukraine's head of state might have replied with a curious grin that told of something very new coming. "Make Ukraine a state; my government will accept all of your conditions without reservation. Send in your Commission's bureaucrats right away to implement the conditions. To protect them, I recommend that you send along military troops from your state militias as well as the small federal army you have. We could even request that U.N. peace-keepers come along. Putin is already in hot water at the U.N. for continuing his KGB tactics as president."

"What if he keeps sending in Russian troops?" Merkel might have asked.

"This is why speed would be so vital, both in Ukraine's accession, which could be of a limited term if that is easier for you, and the influx of bureaucrats and others doing the E.U.'s business and protecting them. Ukraine would agree to the Schengen Agreement on open borders, and I would request that the E.U. attend immediately to the external border--meaning that which we share with Russia. Securing that border has precedent for the E.U., does it not?" In fact, the need to protect the E.U. bureaucrats pouring into the eastern parts of Ukraine with troops from the state armies would mean that NATO would be relevant. This point, if made explicit, could deter Putin from sending in still more military hardware and troops.

"Please excuse us as we discuss this proposal," Van Rompuy might have politely yet curtly told the Ukrainian head of state. After all, the E.U. leaders do their best work behind closed doors. The point is that their minds need not be closed either. Lemons can indeed be made into lemonade.

Even if this scenario is too outlandish to be taken seriously in a world so wetted to the status quo as its default, thinking in such terms "outside the box" could stimulate more realistic policy prescriptions going beyond the austerity vs. fiscal stimulus dichotomy. For example, the notion of troops and hardware from state militias in the E.U. going along to protect federal bureaucrats might prompt an E.U. leader to suggest that the state armies transfer even more to the small federal army of 60,000 troops. Doing so would enable the state budgets to accommodate both more fiscal stimulus and lower deficits as less military spending would be needed. I am assuming the E.U. would pick up the tab for the operation of the added hardware and the salaries of the additional troops. From the perspective of the E.U., the shift would mean less duplication. How likely is it really that Belgium and Portugal, for example, would need to use their respective armies anyway? In the context of continued stag-deflation, such nationalist luxuries are difficult to justify, especially considering the opportunity cost in terms of stimulating the economy.

In short, the E.U. need not have faced a future of stagnation. Ideas hitherto undiscovered can indeed have great value in practical results. The key is to think beyond the confines of what are presumed to be the only possibilities. The human brain has a tendency to shrink the possible in a way that cuts off many potentially fruitful possibilities without any recognition of doing so. The advisable condition of receptivity is to welcome such ideas into the public discourse rather than going with the knee-jerk reaction of "that's too radical!" or "that would never see the light of day." We might be surprised what could see the dawn and beyond.

1. Liz Alderman and Alison Smale, "Divisions Grow as a Downturn Rocks Europe," August 29, 2014.
2. Ibid.
3. Ibid.