Thursday, April 28, 2011

Information Is Power

As a policy wonk, I was excited to see Ben Bernanke's press conference, the first ever at the Federal Reserve. I know there aren't a lot of us out there, but in a time where people are uncertain it is important to hear from the leaders who are supposed to be looking out for our best interests. I wrote a column for Government In The Lab about how these conferences came to form. Now, it wasn't as entertaining as Donald Trump, but more importantly it wasn't stupid.

While many people on Wall Street are very good at math, I kinda doubt many of them were history majors. After the Civil War, recessions were a pretty common occurrence and it hurt a lot of businesses around the country. The turn of the century was a time where the dollar was just starting to go into circulation, which meant when there was a slowdown in the north it affected the south and vice versa. But there was no Standard and Poors or Moody's coming out with information where people can get a picture of what was happening. To stop these blips in the economy, President Woodrow Wilson signed the Federal Reserve Act in 1912. The central bank had two mandates which still drive its policy decisions today: 1) control America's monetary policy and 2) create jobs.

Whatever Ben Bernanke said at the conference is on the record and can be held accountable too. For instance, one of the bigger items mentioned was the Quantitative Easing (QE) policy being implemented, and there is controversy over how effective it has been. Basically, the Fed is buying back the mortgages the banks sold before the recession thinking the housing bubble wouldn't burst. The Fed claims this has allowed banks to clean their books giving them the ability to loan each other, small businesses, and individual's money to keep the economy moving. The Fed claims this has worked because there has been growth since it has started. But critics point to the fact banks have not been lending a lot of money, the economy hasn't grown all that much (GDP grew only 1.8% the first quarter of 2011), and job numbers are still at an all time low.

Bernanke is just like any other person in charge of a big institution, at certain times they need to cover their own behind. If it doesn't seem like he knows what he's talking about, or the facts don't back up what he's saying, he will lose legitimacy and trust. While addressing reporters' questions yesterday, Bernanke said this about the steps the Fed, under his tenure, have done to help the economy recover:

I do believe that the second round of securities purchases was effective. We saw that first in the financial markets. The way monetary policy always works is by easing financial conditions, and we saw increases in stock prices. We saw reduced spreads in credit markets. We saw reduced volatility.

On certain parts there isn't a lot of debate. The market is less volatile; we see this as the stock market has gone up, banks are no longer in need of extra money, and most companies are reporting strong profits this quarter. All good signs. So sure, it seems unlikely there will be another recession, but what about the jobs?

When one reporter asked about why there hasn't been strong job growth all Bernanke could say is:
the pace of improvement is still quite slow and we are digging ourselves out of a very, very deep hole. We are still something like 7 million plus jobs below where we were before the crisis. So clearly, the fact that we are moving in the right direction even though that's encouraging doesn't mean that the labor market is in good shape. Obviously it's not, we are going to have to continue to watch and hope that we will get stronger, increasingly strong job creation going forward.

Now if the reporter had the chance to follow up, he could have pointed out the unemployment number is actually around 11 or 12 million people. But this was Bernanke's weakest point during the press conference. The person in charge of creating jobs in this country is "hoping" that the economy will pick up enough so more jobs can be created. Well, I feel more confidant, don't you?

The money the Federal Reserve decides to spend, or not spend, has an effect on all of us. It controls our purchasing power affecting small businesses and their ability to sell their products abroad, and individuals who are having to choose between buying food and health insurance. But now that Bernanke has made these statements, at the next press conference reporters can ask him (after he has spent $600 billion helping the banks recover) why the economy still hasn't picked up as much as he thought it would?

Bernanke did not just become Chairman on a whim. He was an economist at Princeton and his academic writings were very impressive. But even the best economists screw up. Bernanke was on the Board of Federal Reserve while there were signs the economy was declining. And even though the Fed was fully implemented in 1913, look up what happened on October 29th 1929. You can always find economists disagreeing with each other, like they did before and during the Great Depression. But now we can ask the person in charge what he/she thinks, which goes a long way to making sure the Fed is implementing the right policies, and will help businesses and families plan for their future.

Monday, April 18, 2011

Protecting the Social Fabric

The International Labor Organization (ILO) has released a report titled Sharing Innovative Experiences. The eighteenth edition of the book gives examples of social protection programs, similar to what Social Security is for the US, that have helped to improve a developing nation's economy. The focus is on eighteen countries that have implemented policies that created retirement plans, allowed children to go to school, and families to receive adequate health care. With these programs in place, thousands of people in developing countries were able to improve their living situation and lift themselves out of poverty.

As people who read this blog know, I am a fan of Amartya Sen's Capabilities Theory. In fact, I wrote an entire thesis on it. It has been proven time and time again that raising a country's Gross Domestic Product (GDP) does not mean the people living in that country will be able to live a better life. But the Capabilities Theory puts the emphasis back on the people and what they need to live. The ILO uses this theory in their research and promotes policies that will increase people's quality of life, rather than increase a companies profit. The emphasis on Social Protection Programs is a direct result of this theory, and as I will show here, not only helps people live a better life but grows the countries economy as well.

Those living in the developing world (and are lucky enough to have a job) often do not earn enough to pay for themselves and their family's medical needs. Not to mention the ability to save for retirement or pay for their children to go to school. The ILO looks at social protection programs as a way for governments to invest in their people (sound familiar?). But in the developing world, just 1 in 10 people have some sort of retirement pension, and even less (1 in 20) are enrolled in a health care plan. Social protection programs are needed so families can focus on their current situation, and in some countries have proven to reduce poverty in half. These policies make it easier for families to obtain food, an education, and health care, which not only make it easier for families to live their lives, but builds a stronger labor force for the future.

According to the ILO, over a billion people have been helped from Social Protection programs. It has been "one of the most impacting tools to change quality of life of the poor and vulnerable," according to Francisco Simplisio head of the Division for Program and Knowledge Management at the United Nations Development Program. In an interview I conducted upon publication of the new update, Simplicio explained, "that's the key portions of experience in collecting developing countries perspectives implementing it and making it possible for implementation. That's one of the innovations of this book. And then of course it makes the case it's possible, which is the second major step."

The first example in the book comes from Argentina where there is the Universal Child Allowance (AUH). In 2002, 60 percent of Argentina's children were living in households that were recognized as below the poverty line. This program covers children 0-18 years old where families are given allowances of $46.20 per month and must prove they are in school and registered for health care services. The program is divided by two subsystems called the contributory where all formal sector workers are registered in the system; and the non-contributory subsystem comprised of retirees.

Today, 85 percent of Argentina's children are covered by AUH. To make sure the money was not being wasted, parents must sign affidavits, and letters must be signed by teachers and doctors affirming the child has been attending school and receiving treatment. Books, which are considered legal documents, are also kept by the government. Since the allowance is distributed through bank accounts, if a large amount of money is taken out at once it would be suspicious and violators risk not receiving allowances in the future and the possible facing prosecution. Nine million children and over two million retirees receive these benefits. With families receiving these allowances, they no longer have to worry about arbitrary policies that can force them to lose their home or job, and now have more certainty going into the future.

But in order to pay for these programs a combination of private and public sector investment is needed. The Director of the ILO's Economic and Labor Market Analysis Moazam Mahmood told me, "the beginning of the report says demand issues are critical as well. So you need to generate the level of aggregate demand to generate employment." Greater employment leads to more revenue and enables governments to expand their programs and cover more people. But the state still needs to lay a foundation for companies to invest in their country. "But it also has to come to from the public sector" Mahmood said "and we note the depressing statistics in terms of the production of the role of the public sector and much needed infrastructure because the report also notes the shortage of infrastructure has the potential to reduce GDP growth 2 percent a quarter."

It is not expensive to implement these policies. Less than 2 percent of global GDP is needed to provide a basic set of social security benefits to the world's poor. With over a billion people living on $1.25 a day, there is, of course, starvation. But several countries have implemented social programs that that allow families to buy food. The ILO has calculated an investment of 4 percent of the worlds GDP can reduce the food poverty rate in low income countries by 40 percent.

By investing in their people countries have been able to invest in their future. With their basic necessities in place, individuals can focus on obtaining better skills to get a better job. They are also able to work harder because they are well educated, plus physically and emotionally fit. When this is the case, multinational corporations are more willing to invest in a country because it will be easier to make a profit. And they're right. The more education a population receives the more versatile they become for companies who are willing to pay them more.

I know, all this sounds simplistic, but there is vast amounts of evidence to show these policies work. Social Protection Programs are needed in all societies, and Sharing Innovative Experiences is meant to show developing countries a way to improve their economy while at the same time improving their citizens' quality of life. There are a lot of lessons we can learn from the recession; one is that the fabric of society is delicate and it is important to protect the people in it. These programs help do that, and need to be promoted throughout the developing world.

Sunday, April 10, 2011

Did The Republicans Really Win?

Like all political junkies, I wake up early on Sunday's to watch the political talk shows to see what news, if any, is going to be made. This week consisted of the budget battle and the last minute deal that was reached on Friday. So I'm watching Meet The Press and This Week, and the consensus among the reporters was that because the Republicans pushed the Democrats around, and got the cuts they were asking for, they were the winners. But then I wondered: what else is new? While getting an agenda through Congress can sometimes equal a political victory, this policy victory won't equal a political victory for the GOP.

Collectively, Congress has always had low approval ratings. It doesn't matter what they do, people watch the debates on C-SPAN and see the overblown rhetoric used by politicians on the news, and guess what..they don't like it. It gets to a point where both parties are looking like they are trying to save face (which they are) and really aren't doing what they were elected to do, represent the people. The way the negotiations took place this week didn't give American's any more confidence in their government, and instead, showed both sides to be spoiled brats.

We still don't know what the particulars are of the $38 billion that was cut, but who cares?! All the Republicans cared about was appeasing the Tea Party and cried for more cuts after getting what they originally asked for. I'm sure when John Boehner met with Harry Reid and President Obama at the White House, it was pointed out to him that polls consistently showed the majority of Republicans wanted a compromise. But all we got was more rhetoric and statements that argued for more cuts because it will help the economy or because abortions are bad. Both arguments are the crutch Republicans turn to when they know they reached too far, and people are sick of it.

The Republican's also liked to say elections have consequences, which is true. If the Democrats kept the House last year none of this would have happened. A Continuing Resolution would have been passed to keep spending levels where they were and no one could have complained. It's been done many times before. Even though they got their sound bites out there, the GOP never came up with one policy solution to help end the situation. If the government shut down it would have been their fault because they are the ones complaining.

In the meantime, Democrats looked like they didn't even know what they stood for. Even though they still control the Senate and White House they weren't able to get a strong message out. The way Boehner was acting was a gift for them. When he says that Government is the problem, Democrats should have reminded him of TARP (which he was in favor of) and how the program has actually earned America money. It was probably just easier for him to support it while George W. Bush was going to have to sign it into law. While Democrats can't totally claim it was their idea, there is no reason they can't use it to argue against Boehner's assertion that government programs were hurting the economy.

I'm not going to go as far to say the Democrats won, but it's hard for me to believe the Republicans took the trophy. American's want to see their government work for them, and when they see both sides bickering over an issue that really isn't going to help anyone, it makes them feel they don't have the right people representing them. As both parties tried in the aftermath to position themselves as "winning" they need to realize at some point they are going to get booed off the stage.