Archive for the ‘ Financial Crisis ’ Category

Made in China–ahem, Italy

The tragic fire at a factory on Sunday, December 1st, 2013, which cost 7 employees their lives, has barely begun to shed light on the industry’s illegal insurgence and Italy’s lack of capacity to do much about it.

Credit: wantchinatimes.com

Pronto moda is a case of what The Economist tags as “reverse globalization.” Cheap materials are shipped from China to Italy–as are the workers, as are the sweatshop concept and conditions. One city, Prato, just northwest of Florence, plays host to over 5,000 factories like the one that burned down on Sunday and some 50,000 Chinese workers buried in 16 hour work-days. Faux-designer products are pumped out at superhuman rates with the facade of labels from designer brands (although the “Made in Italy” label remaining true) and are sold for extremely cheap prices to locals and tourists. Before Italian taxes can even make their claim, more than half of the $2.7 billion profits find their way back to China undeclared.

Chinese utilitarianism and black labor practices are brought to Italy to take advantage of the necessarily perfect combination of an apt market for the pronto moda scheme and weak rule of law in Prato (as what may be an indication of the weaknesses sustained at the national level; consider Rule of Law 1 and Rule of Law 2 to observe Italy’s troubles). Workers, essentially indentured servants, are likely to be left with their promises of a return back to China unfulfilled as they work, bathe, eat, and sleep (in cardboard accommodations as was the case for the victims) within the same few square meters.

The devastating event made headlines in international media; however, the problem for Italian officials isn’t anything new to them. Roberto Cenni, Prato’s mayor, claims that they investigate hundreds of the 3,000+ illegal business every year. The proliferation is too much to handle, he claims, and the operations that Italy is able to shut down only sprout back up the next year. As China merely renders, capitalizes, and improves on what domestic organized crime has done in the country for so long, Italy is forced to drastically improve from the inside-out if it is to have any chance at beginning to address the complicated issues at hand in Prato.

Citigroup writes bill and history (which is now set to repeat itself)

Credit: usnews.com Silver linings are only hard to come by depending on which side of the spectrum you’re on.

After passing Dodd-Frank in 2010 and letting Wall Street go with a mere slap on the hand and a “Don’t you ever do that again,” United States Congress passed a bill to enable Wall Street to do just that: repeat history and endanger us with another crisis due to egregious financial management.

Passing  292-122 votes, the Swaps Regulatory Improvement Act reverses the portion in the 2010 agreement that restricted Federal Deposit Insurance Corporation (FDIC)-insured funds from being invested in high-risk “swaps” also known as derivatives, the same type of investments that brought down banking giants like Bear Stearns, AIG, Lehman Brothers, Washington Mutual, Wachovia, and countless others. Aptly interpreted by dailykos.com, this means that, “In short, this bill socializes risk (we all pay for their gambles if they fail) and privatizes profit (they gain a whole lot with very little risk because of your guarantee).”

To ask, “How does Congress get the nerve to write such a bill?” would be an inaccurate question. Citigroup, in fact, is responsible for having written 70 out of the 85 lines in the bill. The financial giant is again able to afford such extracurricular activity on Capitol Hill thanks to a $45 billion dollar bail out after the first go-’round. Still, Congress summoned the courage it takes to copy and paste (changing merely two words from singular to plural in two of the most essential paragraphs) during the writing process and voted for it, indeed, overwhelmingly so!

Nearly six times as much money, $22.5 million to $3.8 million dollars, were given to members who voted for the Act according to a Maplight report. History is poised to repeat itself should Too-Big-To-Fail again be tested. And why shouldn’t it? It’s not their risk that is at stake, only our risk for their gain.

Examining the German and Californian shifts on immigration

International Organization for Migration sign promotes the benefits that immigrants bring.

International Organization for Migration sign promotes the benefits that immigrants bring in front of the UN building in New York. Credit: internationalcomparisons.org

“Kinder statt Inder” or “Children before Indians” was reverberated throughout Germany pervasively in both policy and public attitude only a decade ago. Since then, Germany’s success at withstanding the financial crisis has brought about a good problem, albeit one that requires a shift in such policy and attitude. Germany’s joblessness and decline in overall population has required it to look elsewhere than domestic means in order to fill gaps in its labor force.

In a relatively abrupt 180 degree turn, Germany has welcomed over 33% more immigrants in 2011 than 2010, attempted to ease the adaption process socially by providing language lessons, and have reduced the required financial requirements like minimum salary.

Germany is hardly experiencing a change of heart. The shift comes from certain political motives and not necessarily humanitarian benevolence.  Meanwhile in California, although the impact is yet to prove as profound (especially from the national front), considerable victories have been accomplished just this past week.

While Washington waffles on immigration, California’s forging ahead. I’m not waiting.

California Governor Jerry Brown sweepingly signed immigration bills one after the other last week in an effort to demonstrate to Washington that, outside of President Obama’s Deferred Action for Childhood Arrivals (DACA) from summer of 2012, it will neither lean nor wait on Washington to make demonstrative moves toward immigration reform. DACA has provided some foundation by applying prosecutorial discretion to all cases concerning the children of parents who have immigrated illegally. This has opened the door for states to grant certain liberties to immigrants, and Governor Brown is taking full advantage.

In his first move he granted immigrants the ability to obtain driver’s licenses. Since DACA, the number of states that have allowed driver’s licenses to immigrants has jumped from three to eleven.

He also signed a refined version of the TRUST Act after it easily passed through the state Assembly and Senate. The TRUST Act limits detentions to only those who have committed felonies, not misdemeanors. The TRUST Act is a direct response to the Secure Communities program which was originally intended to remove the most dangerous immigrants with a criminal history. The program, however, has been criticized for removing immigrants with petty misdemeanor charges as well.

Also signed were bills to limit an employer’s ability to threaten to report their immigration status to authorities. This gives the concerned employee more ability to handle wage issues, abuses in the workplace, and to work in an overall better environment according to an LA Times article.

Still another bill has been passed to disallow ones immigration status as a hindrance to becoming an attorney in the state of California.

With his hands more or less tied in Washington, President Obama has no other choice after seeing his Dream Act fail miserably but to resort to relatively quiet measures like DACA and depend on states to take charge from there. California has done just that. Unlike Germany where the motive has been ulterior politically and economically, California truly stands out as it achieves these steps toward immigration reform for the sake of the immigrant, himself.

Monsanto and India: distinguishing between stakes and culpability

We conclude our Monsanto series with a final blog on the multi-national’s effects in India. Especially with Prince Charles having drawn attention to the crisis as early as 2008, much controversy and accusation has been thrown around by both the company and organic enthusiasts. The controversy in a nutshell could be frased as, “which factors precisely are to blame for the suicide rate increase in India?” As muddled as things have been, it becomes necessary to clarify as much as possible.

      • Multiple factors likely at play in suicide rate and farming failures

        Studies have sourced draughts, untimely rains, rural poverty, and others say that Monsanto is the principal culprit. All of the former factors undoubtedly have a direct and profound, negative impact on farmer suicide rates as well as the impoverishment of the farmers in a more general, yet still very grave sense. It’s difficult to quantify, let alone pinpoint, the source of the farming suicide rates, yet it remains safe to say the Monsanto GE product has only significantly agitated the case.

      • Monsanto’s product hardly “magic”

        Monsanto promised India a biotech cotton product that would be nothing short of “magic.” What Indian farmers got didn’t even live up to being “pest-proof” as promised. To the extent to which this directly caused how many farmers to take their own lives is difficult to determine; what can be established, however, is that Monsanto has followed its own footsteps in a long history of choosing the betterment of its name and bottom line over the livelihood of its clients or those befallen to the consequences of the company’s decisions. Such fantastical promises worked out better for Monsanto’s strategy than the success of the farmers.

      • Farmer suicides is not the sole issue

        Indian farmers are forced to pay 1,000 percent more for genetically engineered (GE) seeds. Additionally, whereas with organic seeds Indian farmers even after a season with little to no product can still salvage the seed for sewing next season’s crop, the Monsanto seed is genetically engineered to yield a seedless crop, leaving the farmer with no choice but to buy additional seed. Antagonizing the draught issue, Monsanto crops require twice as much water as the traditional product. With the government having aggressively pressured Indian farmers over the last decade to convert to the Monsanto seed, the farmer has found himself in a debt trap, unable to benefit from India’s Green Revolution.

Finally, it should be noted that the Monsanto clients in India are not the only ones being affected. Early this year, Dr. Vandana Shiva controversially tweeted the genetically modified organism imposition in India to rape. Sayer Ji clarifies and defends Dr. Shiva’s claim by noting that

… many GMO crops are wind and insect pollinated, their pollen (and the transgenes they carry) easily evade containment and are capable of traveling great distances. For instance, if pollen from genetically modified corn reaches a receptive non-GMO corn plant, transgenes will be forcibly integrated (through sexual reproduction) into the germline of their offspring, rendering them and all their future offspring permanently GMO. This could therefore be defined as a form of ‘bio-rape.’

As the product pollinates and yields a crop carrying the transgene to the unknowing, faultless farmer, he then becomes liable to Monsanto as using their patented product outside of contract. Just as the culpability for farmer suicide rate increases in India may not be Monsanto’s sole responsibility, the consequences are not limited to Monsanto farmer suicides or even Monsanto farmers themselves.

Italian and French policy values heritage over Monsanto

Yesterday, Italy (from where itnernationalcomparisons.com will conduct its research and reporting starting in October) set a valuable precedent in the world’s fight for an autonomous food system, the EU’s battle against genetically modified organisms (GMOs), and a country’s fight to maintain original taste and quality in its produce.

The protection of Italian distinctiveness must be a policy priority since it determines the existence of ‘Made in Italy’, which is our engine, our future, our leverage to return to growth in the food industry.           -Statement from Italian agriculture ministry

Based on this quote, an 80% public backing, and the decision by three separate governmental ministries to ban Monsanto’s MON810 maize,  the Italians resoundingly favor their own original food over Monsanto’s GM, uniform product. So the Italians are not only setting precedent in standing up against the health risks from GMOs and the corporate irresponsibility from Monsanto, but also by adding another element to the argument: pride in country*. And without the latter, the Italians see their hopes of recovery as significantly diminished. According to Italy, Monsanto’s monopoly and bland, uniform product represents such a threat.

In 2012 the French, the most prolific crop growers in all of Europe,  also banned the same product, the only GM product allowed in the EU. France also claims national heritage to be a factor in its decision in spite of the temporary hardship the French face as they transition agriculturally and economically away from MON810. From France and Italy’s perspectives, having little to do with GMOs is still too much.

Perhaps Italy and France have gleaned from the India-Monsanto relationship, which is too much to take on in the same blog. As we prepare research to be released on our new Health Regulation page coming soon, look forward to more blogs on chemical policy, the precautionary principle, and its commercial antithesis: Monsanto.

*Regardless to what extent Italy made its decision as a matter of national pride in its produce, they will need to provide a scientific basis, a “health or environmental risk,” if their position on MON810 is going to stand. France implemented its own custom ban on GMOs last year by going through the same process.

Norway=model; exception

In addition to already having country profile pages for Germany and Japan, we have recently just added Denmark and Norway (also accessible from our home index page under the “countries covered” listing). While putting together the Norway page, we realized even more how exemplary Norway truly is.

Norway is not a member of the European Union. Also a factor in escaping the eurozone crisis is their oil and gas industry which has them benefiting from the largest budget surplus among all advanced democracies. Norway has an unemployment rate below 3%, no net national debt, and around $640 billion dollars stored away in a sovereign wealth account, mostly from its oil and gas industry. In 2009 Norway earned the highest per capita income.

Deserving much credit for its success is Norway’s fearlessness to tax. Their prosperous oil and gas industry receives a 28% corporate tax and a 50% industry surtax. Overall tax as a share of GDP is among the highest in the OECD. Corporate taxes are four times as high as U.S. rates. Their highest income tax bracket kicks in at $124,000 at 47.8%. Yet businesses aren’t saddling up to head to places where they might save on looser tax breaks, an argument from those in the U.S. representing a vast majority who refuse to consider any tax increase. In fact, start up activity not only in Norway, but also Denmark, Switzerland, and Canada is higher than that of the U.S. From 2006-2009, the U.S. economy treaded at a practically stagnant .1% growth rate compared to Norway’s exponentially faster rate of 3%. Norway also boasts more entrepreneurs per capita than the U.S.

Part of the reason why business owners are so keen to comply without raising a stir at Norwegian taxes is the sense of appreciation they have for the system. Norwegians benefit from free education from preschool to graduate school (often including universities outside of Norway); free healthcare; generous unemployment benefits due to a competitive, employee-friendly job market; forty-six weeks of maternity leave paid in full, 10 weeks for paternal leave. Education, retirement, and medical expenses are three paramount concerns for the average U.S. citizen, but all of which are provided in Norway. There’s a sense of giving back to the system in Norway for the ways one has benefited previously from the system.

 

Adapted from“US fiscal debate could learn from Norway” by Mark Provost from Progressive Press and  “In Norway, start ups say Ja to socialism” by Max Chafkin in Inc. Magazine.

Tackling taxes and misconceptions concerning US recovery

US deficits are a result of massive tax cuts, huge increases in military spending, the new Medicare drug benefit, and a serious recession caused by poor use of tax cut funds, crazy mortgages, and a massive housing and financial derivatives bubble. First: taxes. American politics is awash with the idea that lower taxes will help the economy; however, higher taxes properly spent will, in fact, help the economy. Advanced democracies (such as many of the subjects on internationalcomparisons.org) all have significantly higher tax rates than the US while maintaining a higher standard of living. In modern US economic history, higher tax rates are usually associated with higher growth rates. The last tax reform in 1986 increased taxes on business and was followed by years of increased investment. When taxes were lowered during a boom in 2001, it was followed by the biggest bust since the Depression. The danger is posed not by taxes, but by debt, speculation, and excessive money growth.

Under-taxation causes deficit spending, which increases borrowing. Money in Treasury bonds may or may not be invested in growth. The borrowing can be redeemed if the spending it supports is productive, that is, longer term and causes more growth than the burden of debt. Otherwise, taxes that are designed to pay interest on debt become a dead weight on economic growth. Unfortunately, in recent years most of the deficit has not been invested in growth. At the end of the Clinton years, the US budget moved into the black, a rare event, followed by the biggest tax-cut deficits in US history under Republican G. W. Bush. Tax cuts have gone to increase upper incomes with devastating results for the deficit, jobs, and growth. Job growth, in fact, slowed down and the economy went into the worst crisis since the Great Depression. On top of tax cuts, doubling down on bad policy, for the first time in American history, the elite decided to fight wars without paying for them, ballooning debt even more. Over comparable six year periods, Clinton’s tax increase was followed by a 16.2 percent jobs growth; Bush’s tax cuts were followed by a 4.8 percent job growth. For GDP growth, the score was Clinton, 26 percent; Bush,16 percent. For median income, Clinton, up 14.7 percent; Bush, up 1.6 percent. Bush claimed his policies would decrease national debt by $3 trillion; the debt went up by $1.7 trillion over the six years. Continuing the cuts raised the debt by $2.5 trillion over 10 years.

I have been unable to find any audit of where the tax cut money actually went. I only found: “Moody’s Analytics Chief Economist Mark Zandi estimates that making the Bush income tax cuts permanent would currently generate only 35 cents in economic activity for every dollar in forgone revenue.” A lot seems to have gone to personal consumption by the wealthy. One corporate mogul bought a bigger boat in Italy, for example. A lot must have gone into purchases of assets without increasing their productivity, that is, into houses, collectibles, and housing speculation. Unqualified buyers bought homes they could not afford and gullible investors trusted corrupt bankers, insurance companies, and bond rating agencies who pushed the Ponzi bubble higher and higher. Some of the money that went abroad came back from Asian exporters into US treasuries, an unproductive investment. Some of the money probably went into US growth and jobs. (If you know of a good quantitative analysis, let me know.)

The underlying reality is that, within some limits, taxes usually create more jobs and growth than does private spending, so long as the taxes are progressive and the money is wisely spent. Government does a better job because the private sector has a higher cost per job than government. Taxes shift money from high-cost jobs to a larger number of low-cost jobs, creating more jobs for the same amount of money. Consumer demand shifts from serving high income consumers, who spend less and save more as a percent of income, to average incomes who spend more of their income.

Keynes was right: slack economies can recover very slowly or government can prime the pump of demand for growth. Adequate taxes and anti-cyclical spending combined solve the problem. The late W. Bush and early Obama bailouts to the bankers and AEG who caused the problem, the stimulus, and the rescue of GM prevented a deeper recession. Recent Fed policy, however, seems misguided: lower interest rates do little good when businesses won’t borrow because consumers can’t buy because of unemployment.

The value of taxes for the economy is very well understood by the banks themselves who received government funds to maintain liquidity during the recession. The banks also forecast that lack of federal spending and its spillover into lower state and local spending will be a drag on the economy through 2021. California alone gets $79 billion per year, 40 percent of the General Fund, from the federal government.

So, more specifically, how should the money be spent and how should the taxes be increased? First, how to spend: Non-ideological economists agree that using the money for infrastructure, aid to states, temporary payroll tax reductions, and unemployment benefits would have been more productive for short-term demand and long term productivity. The tax cuts, by contrast, were like a quick blood transfusion from the weak to the healthy that in the end reduced the ability of the weak to buy much, undermining the long-term health of the wealthy, themselves. I am not, however, happy with payroll and unemployment ideas. I like what the CCC and WPA did and I’d like to adapt it to current needs. There is a lot of work not being done, and low to middle level skills are still needed. There are a lot of people willing to work for what they used to make or less, which has a low cost per job, is not inflationary and is not enough to keep them when better jobs come along with recovery. It’s a triple play: it gets work done, helps aggregate demand, and provides a social benefit totally superior to giving the affluent even more money.

Another issue is how taxes should be reformed, with five choices:

  • reduce taxes by raising fees,
  • raise rates above historic levels (tax rate increase),
  • restore rates to previously prevailing levels (tax rate restoration),
  • close tax loopholes, and
  • shift taxes from “goods” to “bads.”

Fees replace taxes: If a state lowers tax support for its colleges and raises tuition, is it a tax increase on students? For a social good like education, the fee approach is regressive. However, for private goods it requires beneficiaries to pay, which makes sense.

Concerning rate increases or restorations, the US is fortunate to not have to raise rates; it only needs to restore rates that prevailed during a better economy.

Concerning loopholes, they need to be understood as a budget expenditure, a tax budget
expenditure, no different from an outlay budget expenditure. Is closing a loophole a tax
increase or a budget cut? It’s both, but it is not a tax rate increase. Closing loopholes has four benefits: it reduces deficits, improves vertical equity, improves horizontal equity, and improves economic fair play. Vertical equity improves because more taxes come from some upper incomes, increasing the amount from all upper incomes. Horizontal equity improves because people with similar incomes are taxed in a similar way. Fair play improves by creating a level economic playing field by not using the tax code to promote market winners.

The tax code does hundreds of favors to vested interests reducing their taxes relative to other high incomes. The Joint Committee on Taxation and Treasury Department disclose the tax expenditure budget but only list the loopholes without adding them up. In 2011 Citizens for Tax Justice estimated $365 billion in subsidies for business and investment.

Tax expenditure budget spending is out of control, perpetuating itself, unlike the outlay budget, without annual review by Congress. Upper income people who do pay their share—and many pay much higher taxes than other high income people—should be more concerned about the unfairness to them and the distortion of markets, undermining market-based growth. Many giant corporations pay little or no tax. Corporate tax incidence is difficult to figure out, but assuming half falls on owners and half on consumers, the result is the same for individuals: corporate tax avoidance equals personal income tax avoidance. In June 2011 the Center for Tax Justice reported that 12 big corporations with profits of $57 billion per year paid taxes of minus $833 million. That is to say, they did not pay takes; on average, they received checks from the IRS.

We should shift taxes from “goods” to bads”: A simple carbon tax, increased gradually, is a tax on “bads” that can easily allow reduction of taxes on “goods” like earned income. This policy will not harm the economy, but, instead, shifts prices at the margin to create an incentive for real growth, improve US competitiveness, and reduce the cost of buying foreign fossil fuels. It will be difficult to catch up with Denmark and Germany; they are decarbonizing and growing sustainably.

“Our addiction to foreign oil is hampering our economic recovery and we desperately need investments in clean energy. We can address these pressing problems, while reducing our budget deficit and pollution, by enacting a simple carbon tax.” –Congressman Pete Stark, Sept. 2011.

Do you know of any other Representative stating the obvious?

Government can promote jobs and growth in the several ways outlined above, but does much more if it does what it is supposed to do. Both private and government investment help economic productivity, but in different ways. Government consumer protection creates consumer confidence, reducing the cost of selling. Government investor protection creates investor confidence, increasing the availability of capital. Government spending on natural resources and reducing pollution provides quality of life services and nature services of great economic value that the private sector is unable to provide. Government spending on health reduces what private business would spend or, absent business spending, increases worker health directly, promoting economic growth either way. Government spending on education has a pay-off in human capital essential for long term growth. Government spending on research provides technological capital used by business for growth. Under-funding government spending on social programs leads to high costs of criminality, jails, and prisons. The US prison population is so big it ,reduces the labor force, increasing the cost. The Advanced Democracies, as reviewed at internationalcomparisons.org, with a fraction of the US crime rate and a fraction of the costs, show how effective education and social programs can be.