Policy Matters Archives – Page 2 of 4

Taxes and Turmoil in Lebanese Politics

A series of protests have begun to rock Lebanon as of mid-March 2017. Protesters are taking to the streets to denounce the Lebanese government’s plan to introduce or increase 22 new taxes on citizens, most notably increasing the VAT tax from 10-11%, as well as various other taxes on food, drink, public notary services, and other categories that stand to impact daily purchases in the country. These measures will further reduce spending power of average Lebanese citizens during a time period when poverty has already risen by 66%(!) in the past 6 years, when around 30% of the population lives below the poverty line, when 9% of the Lebanese population lives on less than $1 per day, and when Syrian refugees continue to pour into Lebanon by the millions, further exacerbating Lebanese economic woes. Furthermore, Lebanon is the 3rd most unequal country on this planet in terms of wealth inequality, and this inequality implies that these new tax measures will primarily impact those who are already struggling to survive, let alone maintain a decent standard of living. In fact, these newly proposed taxes will be what economists call a “regressive tax,” since they will consume a bigger portion of the poor’s income compared to the rich.

The biggest complaint, rightfully so, of the protesters is that Lebanese politicians, with their entrenched system of confessionalism and nepotism, have stolen from public funds to aggrandize their own wealth, and have left the average Lebanese citizen struggling to survive off of the crumbs tossed to them. This rampant corruption, culture of excess, and paralysis of state oversight has contributed to a debt-to-GDP ratio of 140%, one of the highest in the world. Despite such mounting debt, the Lebanese government has little show for it in terms of providing services to the public.

For example, the Lebanese government cuts off electricity for several hours a day throughout the country— sometimes as much as 40-50% of the day, and claims that there are simply no public funds available to provide electricity for a full 24 hours. This is where the new tax proposal comes in; the government maintains that their hands are simply tied, and that these painful measures are needed to make a dent in paying off the public debt. However, when we examine the issue of public debt from the perspective of Modern Money Theory (MMT), we find that this idea is based on ignorance of how taxes and spending work at the public level.

MMT asserts that any sovereign government is capable of printing its own money into existence to pay for anything that it wishes to, from public healthcare to defense to infrastructure, or any other government-funded project. Because the government can create money out of nothing by simply printing it, or electronically transferring it to bank accounts, this by definition removes the necessity to collect taxes as a form of revenue to pay for things. The Lebanese government, for example, could have enough money to pay for electricity 24 hours a day if it simply created money to pay for it by electronically transferring the sum to the bank accounts to pay electricity companies. All of this can be done without ensuring that there is an equal amount of taxes flowing into the government, because the government does not use these taxes to pay for things. It pays for things by creating money out of nothing.

With this understanding, we can then reverse the causal relationship between taxes and public spending: taxes do not fund public spending. Rather, public spending creates the money by which citizens can conduct economic activity, including paying taxes. This is not an example of the classic “chicken vs. egg” conundrum. In this case, we can definitely say which side came first, for logical reasons. Citizens would simply not be able to pay taxes unless they had the money to pay for them in the first place, which in turn must be created by the government and released into the economy through public spending.

This implies that the government’s debt and deficit, as a matter of principle, does not matter to the public sector in the same way that a debt would matter to a household or firm. Government can always print more money in order to pay for things, including interest on debts. If a household tried to create its own play money and offer it to the credit card company at the end of the month, it would be rightfully ridiculed. However, because the government’s currency is universally recognized as bestowing the holder with value, it is accepted anywhere, and for “all debts, public and private.” In effect, it is the sovereignty of the state, and the credibility of their power to meet contractual financial obligations, that gives the money its value.

So, what then is the purpose of taxes, if they are not used to fund government spending? Primarily, taxes are a way of the government asserting sovereignty over its citizens. By denominating the taxes levied on citizens in the currency that they print, the government ensures that there will always be a widespread demand for its currency that people need to obtain to pay taxes. This ability to create money out of nothing and to generate widespread demand for it is a powerful component of state sovereignty, and, as other articles attest, the modern state as we know it would not even exist today without this power.

Taxes also serve another important economic function: they limit how much money a person can spend (purchasing power). When the government is worried about inflation (rising prices throughout society) brought about by rapid economic growth, for example, increasing taxes would be one way of decreasing spending in the entire economy, thus counteracting the threat of inflation. However, what does this mean for a country like Lebanon with a sizable percentage of its population living under the poverty line, and where the problem is too little spending and economic growth, not too much?

If Lebanese citizens have to pay increasingly higher taxes on daily necessities, their purchasing power will shrink. As their purchasing power and consumption declines, businesses will suffer. Investment and employment rates would likely decline, and poverty would increase. This increase in poverty would translate into citizens having even less money to contribute to taxes, since they would be consuming less and would have a smaller income. In such a situation, instead of these new tax measures decreasing the government debt, it is conceivable that they would actually do the exact opposite by increasing it, due to a decline in consumption and income, which are two of the biggest sources of taxes for the Lebanese government.

To conclude, it is time to admit the problems facing Lebanon are much more complex and fundamental than any new tax proposals would ever fix. Taxes do not create revenue for government spending, and in fact, new taxes in the country would even threaten to propel the already unacceptably high poverty line in the country even higher, as incomes and purchasing power are eroded. There is no reason to believe that the government debt even needs to be paid off in the first place, since government can never run out of money to pay for things, including debt servicing payments. Rather, the most fundamental problem in Lebanon is a political system characterized by diversionary religious sectarianism, and a culture of corruption and disdain for the masses that have allowed the Lebanese politicians to usurp public funds for personal gain, all while keeping a stranglehold on the people’s aspirations for freedom and dignity for decades.

Written by Stephanie Attar
Stephanie is part of the third group of students studying at the Levy Institute. Prior to coming to the Levy, she completed a masters degree in political science, with a concentration in political philosophy. Her research always incorporates Marxian dialectical materialism in order to analyze the interconnected nature between the state and the economy. She is also interested in the Arab world, global inequalities engendered by capitalism-imperialism, and radical solutions to advance the interests of humanity.

Community Currencies: A Ray of Light in the Rust Belt

In times of severe recession, cash can be hard to come by. To somewhat maintain their standard of living and avoid being further driven into poverty, some communities developed their own alternative currencies. These community currencies are parallel systems of exchange. They are growing in popularity in countries such as Greece, which is currently battling the failures of modern capitalism, and could also be implemented in parts of the United States. The Rust Belt states could benefit from the implementation of similar initiatives. We take a quick look at how:

Community Currencies in Europe: Volos

The existence of community currencies as parallel monetary systems is justified by ecological economics, a branch of research that focusses on the interdependence of human economics with the natural environment. The aim is to promote sustainable development through the revival of vital aspects of the socio-economic fabric that have taken a backseat with the rise of capitalism: rebuilding social capital, replacing material consumption and bringing back value to labor to mean more than just as a mere factor of production. In short, it brings the market and its dynamics back to the grassroots level where it is simply an arena for the facilitation of provisioning survival rather than primarily for capital gains and growth.

The way community currencies work is best explained through a real-life example. Take, for instance, the story of Volos, a fishing village located in central Greece. Volos has experienced hard times since the Greek debt crisis began several years ago. Now, barter forms the basis of their system of exchange. The underlying currency is a local alternative unit of account called the TEM.

The TEM acts as a temporary IOU that allows for a more immediate exchange of goods and services the villagers in Volos require to maintain their daily living standards. People can exchange ironing service for language lessons, or potatoes for fish, and so on. The exchanges are supported by an online platform where ads for community members’ needs are posted. The system has come into existence to resolve villagers’ limited access to cash. It’s helped to maintain demand and prevent an economic standstill.

Community Currencies in the US: Time Banks

The most popular form of community currency initiated in the US has been the Time Banking system. Time banks were originally set up to create a social support system within neighborhoods, allowing group members to trade goods and services without money. Each hour of community work is exchanged at the bank for a unit of time-based local credit that can be redeemed for other goods and services. In this way, the labor is valued based on time, not market prices.

The positive impact Time Banking leaves on a community extends well beyond just the ability for low-income groups to access goods and services that might otherwise be unaffordable. It also helps alleviate to some extent the systemic problems of inequality that are often not factored into its cost. Although such systems have sprouted around the United States, they have gained much recognition. Participation rates at Time Banks have remained very low, and it remains unclear why.

Can Community Currencies be used more extensively?

So if Community Currencies can improve economic well-being among low-income groups, why is it not more popular? First, the systems have not been studied sufficiently. A lack of research on Community Currencies and their benefits has limited our understanding of their potential, and their growth in popularity.

Second, there are inherent geographic constraints that community currencies have yet to overcome. Under the current format, payment in community currencies is only accepted within small areas. As such, they can only be used for the exchange of goods and services that were arbitrarily made available within those areas. In order to make the system more successful, the geographic reach should be extended, allowing for more goods and services to be taken up in the system.

State intervention could make this happen. A local government could offer tax incentives to private healthcare facilities within the geographic sector of the community currency. In exchange, the health-care facility would accept payment from uninsured low-income clients in the alternative currency. If more necessary goods and services can be included in the range of products made available there would be more sustainable.

Therefore, Community Currencies require the strong and continued support from their local government to remain successful. In Greece, a first step was made several years ago, when parliament passed a law that allowed barter groups to be classified as non-profit organizations. The local government in Volos was appreciative of the change, given that it allows for some semblance of normal everyday life to continue in a time of austerity.

One reason why government might be reluctant to endorse more of these programs is that it challenges the conventional payment system. However, a community currency as a limited IOU need not pose a threat and can be of significant help in keeping up demand. This allows for more stable incomes for a larger proportion of people in the economy and the capacity to generate more tax revenues in the long run. This is especially relevant in an economic environment that is highly dependent on bank credit to remain functional.

As such, the potential of community currencies should not go unrecognized. Governments should step in to help broaden the system, and allow for their participants to reap the full benefits. This way, community currencies can be an invaluable source of demand in times of crisis.

The Case for Community Currencies in the ‘Rust Belt’

The Rust Belt comprises the set of states bordering the Great Lakes, which were once famous for being the heart of manufacturing and industry in the US. This changed with the economic decline brought about by the recessions of the late 1970’s and early 80’s, which continued to worsen with the further decline of US manufacturing.

Entire towns and villages in this region have disappeared along with the core industry that once sustained them. Some towns were able to salvage their economies by capitalizing on tourism or education, but this is not a strategy that can be extended to the entire region. States such as Michigan and Ohio also cope with an aging population, male joblessness, and rising opiate addiction. There is a dire need for the region’s underprivileged to become active and positive contributors to society again.

If aided by the state, community currencies could be the starting point for the Rust Belt states to begin their journey back to being the productive contributors to the US economy that they once were. Just like in Volos, it could boost economic activity and allow members to contribute to the rebuilding of their community.

The economic benefits of State regulated Community Currencies could include incentives for sharing skill sets to allow more unskilled workers to become employed. There would be less dependence on welfare as the marginalized begin to seek more socially and individually meaningful ways of sustaining themselves. This would also offer a much-needed boost to local economies that would be limited to purchasing goods and services within the community

The success of such initiatives often depends on communities coming together and organizing to collectively achieve economic wellbeing, setting aside social and class differences. The effective implementation of community currencies in places like Volos was ultimately determined by the way such systems are maintained and nurtured by the entire community under the appropriate community leadership. Whether such social dynamics also exist to the required extent in the communities of the Rust Belt is still something to be discovered. If so, then there may well be a light on the horizon to guide them out from under the burden of years of poverty.

Written by Athulya Gopi
Athulya is originally Indian, born and brought up in the United Arab Emirates. She joined the Levy Masters Program in 2016 after leading a successful career in credit insurance over the last 8 years. She has a few more years of worldly wisdom than her fellow classmates! The choice to swap her role as the head of commercial underwriting with that of a full-time student came after being inspired to see how Economics works in the real world.

In Defense of Dodd-Frank

It’s been nearly a decade since we first felt effects of the Great Recession. While the recession officially ended, its consequences still affect us. Some are beneficial, others (like sluggish growth and the number of people leaving the labor market) not so much. One of the better side effects of the 2007-2008 crash, however, is likely to disappear rather soon: the Dodd-Frank act. The newly inaugurated White House is eager to scrap that set of financial regulations.

My goal with this post is to present a very simple explanation of what Dodd-Frank is, why some people want it gone, and why we should fight to keep it and strengthen it. Hopefully, this accessible explanation will motivate more people to join the fight. Maybe then we can have our voices heard. With this objective in mind, I am aware that some details will not be pursued to their full extent, but the overall message should still be whole.

Let me start with a very simplified analogy. Think of the financial system as a system of highways. In a modern highway, there are usually a few lanes on each side, separated by a median. There are many regulations put in place to make sure that the people zooming past each other inside two tons of metal–all the while sitting inches away from gallons of gasoline–do it safely. In this analogy, your average American with their savings, retirement account, mortgage, student debt and credit cards is driving north on the “commercial” lanes in their Peel P-50 (click the link, it will help you understand where I am going with this). Besides them are other entities such as big banks, hedge funds, insurance companies and the like. Those are heavy 18-wheelers and tanker trucks, so the massive gusts of wind that they create will shake smaller cars as they pass by. Of course, whenever a P-50 gets into a crash (like when a head of household goes bankrupt) it is tragic, but it does little to the overall flow of traffic. However, when one of those big vehicles crashes, it often leads to a chain reaction of other accidents, which affects all other drivers and overall makes everyone’s day a lot worse.

After the great crash of 1929 (the financial crash, I’m unaware of any major vehicular crashes from back then), a set of fairly stiff regulations were designed to keep the drivers of that industry–namely the banks and other financial institutions–from getting in other accidents of similar magnitude. Those regulations were known as the Glass-Steagall Act of 1933, enacted as an answer to the failure of almost 5,000 banks. The legislation was put in place to strengthen the public’s opinion towards the financial sector, to curb the use of bank credit speculation, and to direct credit towards more “real economy” uses. In our analogy, Glass-Steagall introduced a number of norms to the ‘financial highway’. Most notably, it created a solid median between the financial and the commercial banking lanes. Now, commercial banks could not use their clients’ funds to engage in risky investments in the financial markets. In our analogy, it means that before Glass-Steagall those big trucks were free to go across the road to the “wrong way” whenever they felt like doing so would be beneficial for them. In addition, Glass-Steagall also created the FDIC, which insures bank deposits; think of it as the weight-per-axis limitations that help preserve the roads from the damage caused by overloaded trucks.

Fast forward to the Clinton presidency, 1999 to be exact. By then, the broad belief that separation between financial and commercial banking was necessary had lost force, even though it had kept the American economy away from any significantly serious recession/depression for over 70 years. That year the barrier between the financial and commercial lanes was brought down. Now, banks and other financial players were free to drive on whatever side of the highway they wanted; banks (and others) are now able to use their clients savings and retirements accounts to buy and sell toxic financial assets such as CDOs. As a result, they were able to take bigger risks, which brought–in many cases–good rewards. This is the era of leveraging, or what Minsky called “Money Manager Capitalism.” To some, it was clear that such an environment would eventually lead to a big crash; a few smaller ones serving as a warning. Indeed, with 2007 came the worst financial and economic ‘accident’ in almost 80 years.

Financial regulations are naturally reactionary. As Minsky stated, the economy is inherently unstable, and in good part that is due to the financial sector’s insatiable thirst for financial innovation. Regulators need to remain attentive to the markets and introduce rules to curb too-risky behaviors as they surface. This is especially true in the days and weeks following a crisis. Once the dust has settled we can look into the causes for the downturn, and put in place measures that are supposed to keep it from happening again, not unlike the way traffic regulations are designed. As such, the Dodd-Frank Act was drafted to put a stop to some of the recklessness that drove us to the Great Recession.

In short, Dodd-Frank ended Too Big to Fail Bailouts, created a council that identifies and addresses systemic risks within the industry’s most complex members, targeted loopholes that allowed for abusive financial practices to go unnoticed, and gave shareholders a say on executive pay. It aims to increase transparency and ethical behavior within the financial sector, both of which are good things.

In no way is the Act perfect. Some, like me, would have advocated for much stiffer regulatory practices like rebuilding the division between financial and commercial banks, or taking a more definitive approach to dissolving Too-Big-To-Fail institutions. Therefore, during its somewhat short existence, Dodd-Frank has received much criticism. While some of those critiques were fair and well founded, the loudest critics were the ones coming at a wrong angle. As it happens the loudest critics now have the opportunity to scrap those safeguarding regulations altogether.

The most common criticism of the Act (and the main reason the administration has given to overrule it) is that it has made it harder for people and businesses to borrow. That criticism is untrue. For example, Fed Chair Janet Yellen showed in her latest address to the senate that “lending has expanded overall by the banking system, and also to small businesses.” A survey from the National Federation of Independent Businesses, cited by Yellen, shows that only 2 percent of businesses that responded cited access to capital as a great obstacle to their activities. Furthermore, to claim that Dodd-Frank has a macro impact on lending is, at least, sketchy. As Yves Smith puts it:

“For starters, big corporations use bank loans only for limited purposes, such as revolving lines of credit (which banks hate to give but have to for relationship reasons because they aren’t profitable) and acquisition finance for highly leveraged transactions (and the robust multiples being paid for private equity transactions says there is no shortage of that). Banks lay off nearly all of the principal value of these loans in syndications or via packaging them in collateralized loan obligation. They are facing increased competition from the private equity firm’s own credit funds, which have become a major force in their own right. Otherwise, big companies rely on commercial paper and the bond markets for borrowing. And with rates so low and investors desperate for yield, many have been borrowing, for sure….but not to invest, but to a large degree to buy back their own stock.”

In fact, the amount of cash held by American corporations reached an all-time high in 2013. This shows that companies are sitting in liquidity without investing in the real economy. The hoarding of liquidity could even be considered an actual fail of Dodd-Frank; unlike the stiffer Glass-Steagall act it did not focus on pushing investment into the production of real goods and services.

The publicized reasoning behind repealing Dodd-Frank is untrue, so what is the motivation for lobbying against the regulations? In my opinion, there are two main arguments. The less malicious one is that there is still people out there who believe than an unregulated, free-for-all financial sector is effective, benevolent, and will serve the greater good. It is almost a dogmatic position based mostly on circular logic, and unrealistic economics modeling (which often does not even take the financial sector into account!), and lack of supporting evidence. It should be put aside. The second argument seems to be popular among lobbyists and government officials: reducing regulations will allow (at least in the short run) for immense profits.

Without Dodd-Frank, Wall Street will most likely revert to the risky and reckless practices that led to the Great Recession. The repeal of the act would, in Minskian terms, act as a catapult launching us towards the Ponzi state of finance, in which risky borrowing and lending end in a financial crisis. Doomsday predictions aside, repealing Dodd-Frank would hurt the common folk like you and I. For example, the Fiduciary Rule is likely to also be erased, and it requires that investment advisers put their clients’ interests above their own. This puts people’s retirement savings at great risk. If money managers do not have to act in their clients’ best interest, they will make decisions that allow them to maximize their commission even if it means losing money for their clients. Additionally, to some extent, the repeal would kill thousands of jobs across the nation; because of Dodd-Frank, financial institutions had to create and staff entire departments focused on quality assurance and compliance, without the rules these employees are not longer needed. Finally, without the rules, banks can go right back to targeting the most vulnerable and financially illiterate among us, offering them loans, mortgages, and other predatory instruments they cannot possibly afford; it would be disastrous.

Reverting back to our simplified analogy. Since the repeal of the Glass-Steagall Act, the highways of the financial systems do not have a median, separating investment traffic from going the ‘wrong way’ into the commercial lanes. Further repealing rules such as the Dodd-Frank Act, without substituting with a set of better regulations, is like removing the usage of turning signals, the requirement for turning the lights on at night, and speed limits – all the while releasing the Bull from Wall Street right in the middle of heavy traffic. Accidents will happen, and in the case of our financial highway it does not matter if we are inside the vehicles involved, we are all going to become casualties of the crash.

Germany Does Have Unfair Trade Advantages

In one of Donald Trump’s rants, he claimed the reason why there are so many German cars in the U.S. is that their automakers do not behave fairly. The German economy’s prompt response was that “the U.S. just needs to build better cars.” However, this time, probably without even realizing it, Donald Trump was on to something – Germany’s currency setup does give it unfair trade advantages.

While China is commonly accused of currency manipulation to provide cheap exports, the IMF has recently decided the renminbi (RMB) is no longer undervalued and added it in its reserve currency basket, along with other major currencies. However, an IMF analysis of Germany’s currency found “an undervaluation of 5-15 percent” for the Euro in the case of Germany. Thus for Germany, the Euro has a significantly lower value than a solely German currency would have.

Since the Euro was introduced, Germany has become an export powerhouse. This is not because after 2000 the quality of German goods has improved, but rather because as a member of the Eurozone, Germany had the opportunity to boost its exports with policies that allowed it to maintain an undervalued currency.

Germany and France are the largest Eurozone economies. Prior to joining the Eurozone, both countries had modest trade surpluses.

In the above figure we can see how following the implementation of the Euro, the trade balances of Germany and France completely diverged. The French moved to having a persistent trade deficit (importing more than they export), while Germany’s surplus exploded (exporting much more than they import). After a brief decline in the surplus in the immediate aftermath of the crisis, it is now again on the rise.

In the early 2000s Germany undertook several national policies to artificially hold wages down. These measures were seen as a success for Germany globally. By being part of the Eurozone and holding down wages, the Germans could export at extremely competitive prices globally. Had they not been part of the Eurozone, their currency would have appreciated, and they would not have the same advantages.

In the aftermath of the European debt crisis, Germany took a tough stance on struggling debtor countries. Under German leadership, the European Commission imposed draconic austerity measures on countries such as Greece to punish them for spending irresponsibly. Spearheaded by Germany, The EU (along with the IMF) offered a bailout to Greece so that it could pay the German and French banks it owed money to.

This bailout came with strict conditions for the Greek government that was forced to impose harsh austerity. The promise was that if the government cut its spending, the increased market confidence would help the economy recover. As a member of the Eurozone, Greece had very limited monetary policy tools it could use. Currency devaluation was no longer an option, the country was stuck with a currency that was too strong for its economy.

Meanwhile Germany prospered and enjoyed the perks of an undervalued currency. Being able to supply German goods at relatively low prices, Germany’s exports flourished. At the same time, Greeks, and other countries at the periphery of the union, were only left with the choice to face a strong internal devaluation, which meant letting unemployment explode and wages collapse until they become attractive destinations for investment.

Germany consistently broke the rules of the currency area, without ever being punished. When it first broke the deficit limits agreed upon by Eurozone members in 2003, the European Commission turned a blind eye. Germany is often considered to have set an example for other EU nations by practicing sound finance, and having a growing, healthy economy.

Greece, on the other hand is blamed for spending too much on social services, and many of its problems are blamed on being a welfare state. When you compare the actual numbers, however, Greece’s average social spending is much less than that of Germany. Between 1998 and 2005, Greece spent an average of 19 percent of GDP, while Germany spent as much as 26 percent.

To address these vast differences in the trade patterns of the EU nations, the European Commission introduced the so-called “six-pack” in 2011. These regulations introduced procedures to address “Macroeconomic Imbalances.” However, as found in the Commission’s country report “Germany has made limited progress in addressing the 2014 country-specific recommendations.”

Germany’s trade competitiveness comes at the price of making other members of the Eurozone less competitive. This is something that Germany needs to be aware of when responding to the problems other economies are facing. Currently Germany is demanding punishments for countries whose have few policy tools available to stimulate growth as Eurozone members.

However, Germany should keep in mind that the Euro is preventing the currency adjustments that would take away its trade competitiveness. Without a struggling EU periphery, there wouldn’t be a flourishing Germany.

Removing the Blinders: Trump Voters and Racial Inequality

A friend recently told me that he voted for Donald Trump, despite the candidate’s racist approach, because racism is “something that hasn’t existed [in America] for sooo long.”

We know some groups of voters—e.g. the KKK—deliberately organized and voted not to “make America great again” but to make America white again. While we don’t know how many of this type there are, we know they couldn’t have elected Trump on their own. They had help from people like my college-educated friend, who thinks racism is confined to history books. This tells us a lot about the degree to which voters are misinformed. Millions of people decanted towards a racist candidate even though they don’t consider themselves to be racists. The election made it clear that there are enough people like my friend to get Donald Trump elected.

15064263_10210729624538835_1318057045_o — Illustration: Heske van Doornen

In our last piece we discussed Dean Baker’s book, which shows that many policies and institutions disproportionately benefit the social elite, and in effect, further marginalize the already marginalized and perpetuate inequality. People of color have long been kept down by policies and institutions that favor the hegemonic class. Racism will not be an issue of the past as long as we have a rigged socio-economic system that systematically breaks down communities of people of color, concentrates poverty to their neighborhoods, cripples their educational opportunities, and limits their access to better incomes and wealth accumulation. The numbers below speak to such current racial disparities.

Wealth and income inequality

Figure 1 shows the disparities between selected races, in terms of wealth, income, home equity, and savings for retirement. As can be seen in the figure, in 2013 net worth for white households was almost 13 times larger than that of African-Americans and 10 times higher than that of Hispanics.

Figure 1. Median Household Wealth, Income, Home
Equity, and Retirement Savings by race, for 2013

Source: Authors’ calculations per The Survey of Consumer Finances (2013)

Not only did whites hold more wealth, but whites also receive higher incomes. A black or Hispanic household in the middle of the income distribution is likely to receive only as much as 58 percent as its white counterpart. While the amounts of savings for retirement for average white households are 4 times larger than those for black or Hispanic.

White households not only have larger sums saved for retirement, but also over 54 percent of these households have some kind of savings. Meanwhile the percentage of black or Hispanic households with savings is considerably lower, as shown in Table 1 below.

Table 1. Percentage of households
with savings and home equity, by race for 2013

	Savings	Retirement Savings	Home Equity
White	54	57	70
Black	39	34	38
Hispanic	37	26	38

Source: Authors’ calculations per
The Survey of Consumer Finances (2013)

Table 1 also shows that average white households are more likely to have equity on their homes. While in 2014 homeownership rates for whites households was at least 26 percentage points larger than the other two groups analyzed here, making whites 1.6 times more likely to own a home—the principal source of wealth-building for most Americans.

Educational Attainment

People of color see their access to incomes and wealth building opportunities severely crippled by educational attainment. Figure 2 below offers a breakdown of educational attainment within each race, using household data. It shows, for example, that 77 and 87 percent of all blacks and Hispanics household heads have less than a College degree as their highest level of education, respectively, while 62 percent of white household heads have less than a completed college education. These differences increase for higher levels of education. As the figure shows, only 7 percent of blacks and 5 percent of Hispanics obtain a graduate degree.

Figure 2. Highest Educational Attainment of Household Head Within Each Race

Moreover, a college degree is not a guarantee of financial success in the future, at least not for non-white families. Even if they attend college, the median wealth return to college graduation for Black and Hispanic households is 9 and 8 percent, respectively, of the returns that accrue to white households, as shown in Table 2. Meaning that for every $1 in wealth that accumulates to Black and Hispanic families, white families accrue $11.5 and $13.33, respectively.

Table 2. Median Wealth Return to College Graduation, 2011

	White	Black	Hispanic
Median Returns to College	$55,869	$4,846	$4,191

Source: Demos analysis of Survey of Income
and Program Participation (SIPP), 2011.

Mass incarceration

The rapid increases in incarceration rates in the U.S. beginning in the mid-1970s have disproportionately affected people of color. By 2008, African-Americans and Hispanics were being incarcerated at a rate 6 times greater than whites and they represented 58 percent of all prisoners, even though blacks and Hispanics only comprise around 25 percent of U.S. population. By 2010, 1 out of 3 high school dropout black male between 20 to 39 years old were imprisoned; compared to just 13 percent for whites with similar characteristics.

As an election-relevant impact of the era of mass incarceration, it is estimated that 1 in 13 African Americans of voting age are deprived of their right to vote as a consequence of voting restrictions imposed by twelve states, with the sole objective of disenfranchising individuals after they have completed their sentences; more than 7 percent of black adults are disenfranchised, while the same restrictions apply to 1.8 percent of non-African-Americans.

The result is that it is estimated that 1 in 3 black males born today is likely to spend some time in prison. And even after they serve their time, wages for black ex-inmates tend to grow 21 percent slower than those of white ex-inmates.

Red lining and exclusionary zoning

Exclusionary zoning and red lining are policies that effectively deny affordable housing and other services—e.g. banking, insurance, supermarkets—to certain groups of the population based on their incomes, race, or ethnicity. It has been widely reported how those policies make it difficult for people of color to find homes in good, safe neighborhoods with access to quality education, employment opportunities, and quality healthcare. The impact of these policies is the creation of race and income segregated areas, with poverty and wealth concentrating in different neighborhoods. It is estimated that a black person is over 3 times more likely to reside in neighborhoods with high poverty concentration than a white person, while Hispanics are twice more likely than whites.

A close reminder of how African-Americans suffer this issue is that the President-elect of the U.S. was investigated and eventually sued by the Justice Department for discriminating against potential black tenants in his company’s buildings; what The New York Times called “the color barrier of the Trump real estate empire.”

These are only a few selected facts, but there are many more; these facts are not as evident to everyone, nor do they capture headlines on TV and Facebook like, e.g., police shootings of unarmed African-Americans.

This piece does not address the reasons, causes, and policies that got us to this point. This is nothing close to a history of racism in America and these are by no means the only injustices that people of color suffer in this country. However, after seeing all this, it should be evident that racism is not an issue of the past—certainly not one for the history books. There are still many people today that lived in racially segregated states under the Jim Crow laws. They had to literally fight for their rights to vote, to access the same schools as whites, or just to sit in the front of a bus. We might not have legal Jim Crow-style discrimination anymore, but American institutions covertly retain remnants of the Jim Crow era. Meanwhile the rich and powerful have rigged American socio-economic institutions with a bias towards their class and race, perpetuating an oppressive system that pretty much defines our place in society according to the color of our skin and the class status of the families from which we are born.

Now, my friend, be careful with any “buts” you might want consider as retort. If you are still not convinced that there is a deeply-rooted-institutionalized race problem in America, then go further than this piece, be curious about it, turn to your black and brown friends—ask them about it, and hear what they have to say.

Post co-written by Daniella Medina and Oscar Valdes-Viera
Illustration by Heske van Doornen

Paid Leave and Daycare: Luxuries of the Wealthy

The U.S. trails the rest of the world in benefits available to families. Currently, the only industrialized country that does not guarantee paid maternity leave for new mothers is the United States. While other countries offer generous paid parental leave and some form of childcare subsidies, the U.S. does not. This lack of policies to support working families widens economic inequality and limits opportunities of children not born in wealthy households.

Deficit hawks often use their concern for future generations as a basis to argue in favor of cutting entitlement programs such as Social Security. Instead of talking about cutting entitlements, the story should be about expanding them with programs that will actually help children, such as providing paid family leave for parents and addressing the rising costs of childcare. If our children are so important to deficit hawks, then why do they oppose policies that would actually have a positive impact on their future?

Various studies have pointed out the positive impact of paid parental leave on both the child and family’s health. Some of the known benefits are lower child mortality, lower rates of post-natal depression in mothers, and a greater likelihood that mothers will return to work. Particularly interesting is a study that points to higher educational attainments and incomes for children whose mothers had taken maternity leave.

In the United States, the Family Medical Leave Act (FMLA) offers 12 weeks of job-protected unpaid leave to eligible employees. To qualify for unpaid leave under the FMLA, an employee needs to have been working for over 12 months for a company that hires at least 50 people. While this might be a start, it leaves about half of the workers uncovered. Even for those who are covered by the FMLA, they must afford giving up their paychecks for those 12 weeks. The act does little to help those who are left out or cannot afford to renounce their paychecks. This adds pressure on people at the lower end of the income distribution that might be pushed below the poverty line if forced to give up their incomes.

California, New Jersey, and Rhode Island are the only three states that offer paid family leave by building onto existing disabilities programs. These states labeled pregnancy as a “temporary disability,” which offered a path to receiving a wage replacement for up to 6 weeks. An extensive study from the Center for Economic and Policy Research found that introducing the policy had a positive or no noticeable effect on 89 percent of the businesses surveyed. However, these policies are very modest compared to the rest of the world, with countries sometimes offering more than 50 weeks of paid leave.

Despite the lack of a federal mandate, some employers voluntarily provide paid family leave. While prestigious companies boast generous leave policies, they are usually only available to highly skilled and highly paid workers. The BLS estimates that about 13 percent of all workers in the US have access to paid family leave. However, there are very large discrepancies between types of workers. Twenty-five percent of those working in the management, business, and financial sector benefit from paid family leave, compared to only 7 percent of those working in the service industry.

The above figure shows the striking differences in access to paid leave by wage level. Top-earners are more than 4 times likelier than those at the lower end to be offered paid family leave by their employer. The data illustrate how mandating paid leave would help those who need it the most and are least likely to afford to take unpaid leave.

Another issue that disproportionately affects lower-income families is the cost of childcare. The Economic Policy Institute found that minimum wage workers would have to spend most of their income on childcare. Another shocking finding is that in 33 states the cost of infant care exceeds average tuition at a public 4-year university. While conversations about college affordability and the debt some students have to incur to cover the costs are common, the issue of daycare affordability is discussed much less. The quality of daycare affects the future outcomes for children, putting those whose parents cannot afford high-quality childcare at a clear disadvantage.

It is fairly common practice in many other countries for the government to subsidize childcare. The generous leave policies, along with childcare subsidies seem to be working for other countries that are catching up with the US in terms of female labor force participation. Surprisingly enough, at some point in its history, the US had a government funded universal childcare program. During World War II, the Lanham Act provided funds to enable women to participate more actively in the labor market. Despite the positive impact the program had, it was abandoned once the war ended and the men who returned took back their jobs. If such a program was possible then, it is most certainly possible now, when a high percentage of women are in the labor market.

With childcare costs outpacing overall inflation, while wages not at the top of the distribution have been stagnating, the burden of raising children falls disproportionately on families that are not wealthy. Paid leave and affordable daycare would help children grow up to their full potential. By lowering financial strain on the parents and improving outcomes for the children, these policies would also tackle the growing income inequality. Instead of focusing on reducing the deficit, which would actually hurt future generations, the U.S should expand entitlements to children to show it is really concerned with their future.

Brazil May Be About to Give Up its Financial Sovereingty

These are strange times. For those who have been drowning in the craziness milk-shake that is the United States presidential campaign and have not been able to follow other world events (we do not blame you), it should come with some assurance to know that the rest of the world is not doing much better. Case and point is that the acting president of Brasil, Michel Temer, who came to power for being the VP of impeached president Dilma Rousseff, is trying to make Brazil the least financially autonomous nation in the world.

Temer and his cabinet, who have been working towards the implementation of austerity measures in Brazil since they came to power, have proposed a constitutional amendment that will severely limit Brazil’s flexibility in government spending. It would be the 93rd amendment to Brazil’s ‘young’ 1988 constitution. In short, the Constitutional Amendment Proposal 241* (PEC 241 in Portuguese), would create an artificial limit to government spending, which would become pegged to the previous year’s inflation.

The Brazilian economy is facing a dire recession even though the Bovespa stock index and real currency BRBY rank among the world’s best-performing assets this year. The pressure towards austerity is coming from both internal and external players, and the financial markets have rallied well to the prognostic of the amendment’s approval. Despite its failure to produce meaningfully positive results elsewhere, austerity is still seen positively by international financial markets.

The amendment makes Brazilian fiscal policy hostage to inflation, thus inverting the hierarchy of economic policy in the country; instead of using of its taxes and spending to control inflation, inflation would control Brazilian economic policy. On one hand it makes the job of lawmakers and policymakers a lot easier, on another it takes away powers granted by the constitution to the Brazilian congress and it is, as put by Brazil’s Attorney General, unconstitutional.

The amendment has been approved by a special commission in Brazil’s lower house on the 6th, and four days later was approved by the lower house as a whole. It comes as a victory to Temer’s austere aspirations for austerity measures had been failing to be implemented in Brazil even during the final days of the previous government. Temer’s own efforts had been facing serious challenges until now.

It is not to say that it all good sailing weather for PRC 241. Portions of the public have come out against the measure. Notably, economists have argued that the debt problem in Brazil is caused by a fall in tax revenue and not because of overspending. Indeed, the high unemployment rates combined with high inflation – among other factors – have caused a real decline in revenue of 2.5%. Meanwhile small business owners in retail have experienced decreases of as high as 30% to their revenue streams.

For those versed in Functional Finance and Modern Monetary Theory this will seem as completely nonsensical. Brazil, currently, is a financially sovereign nation to a good extent. It prints its own currency and taxes on that currency. It, however, has emitted debt in foreign currency, namely the dollar. The amendment would limit this sovereignty, making the Brazilian economy work only within the limits set by the (interior and exterior) factors that affect inflation.

If you have followed our posts for a while, you have read some strong arguments on why austerity is not the remedy for countries facing as recession and that smart fiscal stimulus is much more likely to succeed.

*Some of the sources for this article are in Portuguese.

*This post was written by Carlos Maciel

Italy is Hungry for Expansionary Fiscal Policy

In a meeting with Angela Merkel and Francois Hollande on August 22, the Italian Prime Minister Matteo Renzi proudly announced that Italy has the lowest public deficit of the last 10 years, and will continue with structural reforms to reduce it further. Monti has long aimed to “restore credibility” by cutting the public deficit, and now the Finance Minister Pier Carlo Padoan enjoys praise on his achievement of a deficit as small as 2.4% of GDP. The FED (Financial and Economic Document) goes so far as say this makes Italy “among the most virtuous countries in the Eurozone.”

A closer look at Italy’s economy, however, shows this “virtuosity” has no basis in reality. In 2015, 1.5 million households lived in absolute poverty. Another 4.5 million individuals saw stagnant incomes. The situation has not been this bad since 2005. In addition, the Migrantes foundation informs us that there has been a boom of italians who go abroad, 107,000 in 2015 (+6,2%). Especially youth from 18 to 34 years old (36,7%).
Source: [Ansa.it “Rapporto fondazione Migrantes”]

The percentage of serious material deprivation index is 11,5% for total households members. Official unemployment rate is at 11,9% whereas the real unemployment rate is well above the 20%. The inactivity rate is at 36,0 % and the fixed capital investment ratio is stuck well below the pre-crises (2007-08) levels.
Source: [“Rapporto annuale Istat, 2016”]

It is clear that Italy is stuck in a deep depression. And it’s not alone. Many other euro countries are suffering the same fate. Cutting public spending cannot help them recover. We turn to Keynes to see why it cannot, and consult the work of Minsky and Wynne Godley to see what can.

Keynes and Aggregate Demand

In The General Theory, J.M. Keynes explains the challenges blocking achieving and maintaining full employment in a market economy. He argues that the booms and busts associated with capitalism make this state of equilibrium very difficult to reach. When a bust occurs, and businesses expect their profits to fall, there’s no reason to expect a magical market-force to step in and fix employment while costs are being cut.

This applies to Italy, too. After years of austerity and a Global Financial Crises, aggregate demand levels have declined sharply most people feel uncertain about the future. Additional demand for labor is close to zero and the private sector is pessimistic. Investment and spending is not sufficient to employ the unemployed. Cutting down government expenditure is not going to to help. It will simply make it worse.

Minsky and Fiscal Policy

A follower of Keynes, Hyman Minsky explained how any analysis of a monetary capitalist economy must start from the analysis of balance sheets and its relative financial interrelations ‘measured’ in of cash flows. If balance sheets and especially the relative financial relations are not taken into account within an analysis of an essentially financial and monetary economy, that analysis fails to reflect the full reality.

Minsky’s alternative analysis shows that in case of crisis, a nation needs a “Big Government” (The Treasury Department) and a “Big Bank” (The Central Bank) to step up. These institutions must focus on serving as an “Employer of Last Resort” and a “Lender of Last Resort”, respectively. This way, they can prevent wages and asset prices from dropping further, and tame the market economy. In the Euro-zone, this has not been realized. The Treasury Department is constrained, leaving them unable to reach full employment. Meanwhile, citizens continue suffer under austerity.

Wynne Godley and the Government Budget

Wynne Godley’s sectoral balance approach sheds more light on this Minskyian alternative. He shows the economy consists of two sectors: The government sector, and the private sector (all households and businesses).** The private sector can accumulate net financial assets only if the other sector, government, runs a budget deficit. That is, only if the flows of the government spends more than it receives in taxes. It is impossible for both sectors to run a surplus at the same time.

And as a simple matter of macro-accounting, for aggregate output to be sold, total spending must equal the total income generated in the production process. So given households’ decisions to consume and given firms’ decisions to invest, there will be involuntarily idle labour for sale with no buyers at current wages, if the government deficit spending is too small to accommodate the net desire to save of the private sector.

What Renzi and Padoan are Really Saying

We can now see what Renzi and Padoan are really congratulating themselves for. Having done nothing to lift a struggling private sector out of the recession, they patting themselves on the back for worsening it’s social and economic situation. Renzi may claim he will go to Brussels to “sbattere i pugni sul tavolo”, but his executives continue to respect the Stability and Growth pact regime, and decrease the deficit further.

From Wynne Godley, we know that further decreasing the government deficit corresponds to further deterioration the private sector surplus. So when the officials say they “need to put public accounts in order,” they are actually saying they will put households and business accounts in dis-order. So when they say that Italy has the lowest budget deficit of the last 10 years, they are actually stating that the government is draining more financial assets from the private sector than it has in a decade.

When they call Italy virtuous for keeping a smallest deficit, they assign virtue to the nation that most effectively perpetuates poverty and social disarray. When Renzi says that his non elected executive “will continue […] the reduction of the deficit for our children and grandchildren”, he is instead telling us that his government is going to reduce the net desire to save of the current population, to keep involuntary unemployment and part-time working levels high and to firmly deteriorate the (net) financial and real wealth of the future generations.

Unless Italy changes its approach and adopts expansionary fiscal policy, it will not serve the well-being of the society and its economy. The main goal of full employment will never be attained and maintained. Work will lack moral and economic dignity, public sector goods will fall short in quantity and quality, and basic human rights will be violated. Not only will policy goals fail to be achieved, they will be even farther out of reach. One thing is certain: either Renzi and his ministers don’t know what they’re doing, or they are doing it in bad faith. I am afraid of it may be both.

* To be as precise as possible, Italian public budget deficit has been systematically reduced from 1991, that is the year when the Treaty of Maastricht was ratified which, among other things, established the respect of the parameter of the 3% to the public deficit and 60% to the (flawed) public debt/gdp ratio.
** I do not take into account the foreign sector balance sheet, because the substance of my brief argument won’t be undermined.