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 29^th 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.

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.

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.

Libya's Humanitarian Effort

On March 17th 2011, the United Nations Security Council passed Resolution 1973, which called for a no fly zone over the northern Africa country of Libya. But as the fighting continues, thousands of people will lack food and other necessities they need to live.

In a closed meeting to the General Assembly, Secretary-General Ban Ki-moon said “there is an urgent need for humanitarian access” in Libya. But as soon as the rebels started the fighting, Qadhafi’s forces have been on the eastern and western borders stopping humanitarian agencies from entering the country.

As the no fly zone has been enforced, fighting continued between the Libyan government and the rebels, an entire week passed until three UNHCR trucks were able to enter the country delivering 18.5 tons of pulses (seeds that contain a variety of nutrients), plus sleeping mats and blankets.

With 23 people on the ground, the World Food Program (WFP) has distributed almost 11 thousand metric tons of food within the country and the surrounding camps, but they have only been able to enter the eastern part of the country. Abeer Etefa, Senior Regional Public Information Officer for WFP, told me food has been brought to “7,000 internally displaced persons in Eastern Libya.” But with the ongoing conflict “we face challenges in access to some cities especially in the contested areas. We hope to be able to deploy more teams on the ground as soon as the security situation allows and a safe humanitarian corridor is established.”

As the fighting increased, replenishing the food in the country has been difficult. Abeer told me 95 percent of the shops have been closed, making it more difficult for people to meet their basic needs. As the conflict continues, more people will need to receive aid.

While the total operation is costing $39 million dollars, an additional $4 million is being used to build better communications systems for non-profits working in the country. For the next three months, WFP plans to feed 600,000 people in Libya, and an additional 280,000 and 180,000 to the people living in the camps.

No Traffic Light Ahead

President's have always justified using force in different ways, whether for humanitarian, economic, or to protect the country. But when the decision is made to use the military, there needs to be clear goals. If you are positive military action is necessary, it should be obvious what you want to get out of it. In Libya though, no one seems to know when the strikes will stop or what will be accomplished by them.

As a communist country, Libya has been a thorn in America's side for decades. The jabs have been over its nuclear weapons, and the times Qadhafi tried to take over other countries in Africa. But recently things were going well. Just a few years ago Qadhafi decided to let inspectors to look at his nuclear facilities and accepted responsibility for the
Lockerbie bombing. But then he started killing innocent protestors.

I can't help but remember what President Obama said during his speech when he accepted the Nobel Peace Prize. "To say that force may sometimes be necessary is not a call to cynicism -- it is a recognition of history; the imperfections of man and the limits of reason." With all the protests going on in the Middle East and North Africa, it was only a matter of time before it became violent, and in Libya's this case the military was needed.

While agreeing to use the military, what bothers me is that there does not seem to be an end in sight. General Ham, who is in charge of this operation, has said there are no plans to go after Qadhafi and its mission is to protect the civilians. But how do you protect civilians without attacking the person who is trying to kill them? At one of the daily briefings, the UN spokesman said they have not decided whether the rebels were going to be considered citizens or casualties of war, because, technically, this isn't a war.

One of the country's leading military experts, (and one of my former professors) Michael O' Hanlon, told me in an email that "I don't know where it ends but I don't favor a military operation to overthrow Qaddafi". He also pointed out that the mission has already gone beyond a no fly zone because Libya's tanks have been taken out. But even without tanks, the government forces are much better armed than the rebels fighting them.

It is also unclear how many people are actually fighting against the government. While next door in Egypt the military held a non-violent coup, there have only been a handful of military officers who sacrificed themselves and chose not to fight. But if Qaddafi is going to be forced from office, the majority of the Libyan people are going to have to sacrifice the most.

Qadhaffi has shown no signs of slowing down and has placed his troops on the country's borders where thousands of civilians are trying to escape. To make matters worse, UN workers are not able to get into the country where there are even more displaced people who need help.

There doesn't seem to be much middle ground anymore. At this moment, both sides seem to be waiting for the other to stop, and no one is putting on the breaks. That's why the coalition supporting this operation is going to have to decide whether or not to try and find Qadhaffi or pull out.

Add Value To Your Buck

It's almost that time of year again, tax season! OK, maybe I'm exaggerating on how exciting this is. The US tax code is longer than War and Peace, but just like the classic book, almost no one can understand it, and almost no one today has read it. But someone has to read the code in order to figure out how much money people owe their government. If only there was a simpler way…

Debating tax policy is almost as bad as actually paying them, but here I go. The last time any serious tax reform occurred was during the Reagan administration. The Tax Reform Act of 1986 reduced individual and corporate taxes almost by half, and indexed those standards for inflation. The number of tax brackets were also reduced. But the Act also included the Alternative Minimum Tax (AMT) which only complicated the code more. The more complicated the code became, the more loopholes were there for people to take advantage of. While less money was coming in, the government was spending more, which increased the national debt. The code has become so complicated, and hard to enforce, only 47% of American's who file for federal taxes actually pay them.

President Obama has said he wants to reform the tax code to make it easier for Americans. But what's the best way to do this? There are a lot of ideas out there. Some say there should be a flat tax where everyone pays the same amount. But that's not progressive. It can also hurt those who do not have a lot of money, while people who earn more won't be paying their fair share. Another idea is to eliminate loopholes and certain credits. This could work, but doesn't go at the heart of the problem, which seems to be the way we calculate how much American's need to pay.

One idea that works for forty other countries (mostly in Europe) is the Value Added Tax (VAT). Instead of pushing a sales tax onto the consumer, items are taxed at a percentage as the product is put together. So if the VAT was 10% it would work like this:

- The manufacturer pays $1.00 for the raw materials, certifying it is not a final consumer.

- The manufacturer charges the retailer $1.20, checking that the retailer is not a consumer, leaving the same gross margin of $0.20.

- The retailer charges the consumer $1.50 + ($1.50 x 10%) = $1.65 and pays the government $0.15, leaving the gross margin of $0.30.

The government gets paid each step of the way, and it is clear how much everyone owes so it is easy to enforce. Overall this reduces the costs to the consumer because they don't have to pay so much at the end. The French implemented a VAT in 1954 and today it counts for half of the government's income.

 

But there are opponents. People argue implementing a VAT can cause large amounts of fraud such as false claims. There have been instances where the individual or business argues that they did not know they had to pay a tax on a certain item. Then of course there is the old fashion "hidden sale" where the consumer is charged something that is completely made up.

 

Despite those concerns, studies show that if a 5% VAT was implemented, and covered 80% of goods people consume, it could generate roughly $260 billion. The Virginia Tax Review estimates that a VAT of 25% could pay for health care reform, exempt millions of American families from income taxes and still raise the revenues necessary to cut into the budget deficit.

 

One of the reasons American's are less inclined to pay taxes now is because we became a individualistic society. When FDR was President, there was a "we are in this together" philosophy. But that has gone away. The book Bowling Alone explains it pretty well. But when you are paying taxes, you are paying for the freedoms that people in the Middle East and North Africa are fighting for. Whether you are rich or poor, everyone benefits one way or another, and those who don't pay their taxes are cheating their fellow citizens.

Just because something is European doesn't make it scary. Paying taxes is important. It goes to Veteran Hospitals, public parks, schools, and keeps our food and water clean. But paying for these services doesn't have to be a burden. Instituting a VAT could bring in more money for areas that all Americans use, and everyone could get a bigger bang for their buck.

 

 

Union Politics

Should it be surprising that 62% of American's oppose the elimination of collective bargaining for unions? Without this tool, young children would still be working in factories, people in factories would not be paid as well, and today's health care costs would be much much higher on families. While most American's don't seem to be lost in the madness, I haven't seen one article or report trying to explain what the problem is.

Two weeks ago, Governor Scott Walker said on Meet The Press: "For us to balance the $3.6 billion deficit we have -- but not only now, but to ensure we can continue to do that in the future so our kids don't inherit these same dire consequences -- we've got to have assurances. And over the past two weeks, even after they made those promises, we've seen local union after local union rush to their school boards, their city councils, their technical school boards and rush through contracts in the past two weeks that had no contributions to the pension and no contribution to health care."

Besides the fact Wisconsin's budget office said the state would be fine, Walker is playing politics (and losing), while he tries to make it sound like unions have been the problem. But really, no one has been responsible. Unions will always ask for more money because it's their job. And it's the Governors job to negotiate those costs down. But I don't believe the system is the problem. As Walker points out: "Under Barack Obama, he presides over a federal government where most federal employees do not have collective bargaining for, for benefits, nor for pay." But federal workers have some of the best benefits and get paid more than private employees. Plus, if public unions are the only problem, why have private sector health costs almost doubled in the past ten years?

States are facing fiscal problems mainly because of pensions and benefits which can't be paid for. It is a problem that was seen coming (whether the financial crisis occurred or not) and no one did anything about it. The stimulus package allocated money for companies like IBM to develop programs that would allow doctors to share information on patients. This would allow them to compare and figure out which treatments work best, thus reducing costs. Plus, it saves money on paper work, trees, and you won't have to worry about not being able to read your doctors handwriting anymore. Obviously, this hasn't been implemented yet, but experts agree it would be a step in the right direction.

The vote taken by Wisconsin's legislature last night was a bad political and policy move. It won't solve the problem of rising costs, and it pins one person, one party, against another, which voters never like to see. Walker may think he's winning, but instead he's acting like a putz.

So now that you have my opinion, what's yours? How would you lower health care costs? Or do you think collective bargaining is a problem?