Obama Seeks to Curb Outsourcing

With 2012 being an election year, President Obama set out to frame his re-election bid in November around the economy. Having cited employment and productivity gains of late, he then targeted his ire on tax incentives offered to multinational companies for outsourcing business activities overseas.

The following is an excerpt from his State of the Union Address:

If you’re a business that wants to outsource jobs, you shouldn’t get a tax deduction for doing it. That money should be used to cover moving expenses for companies...that decide to bring jobs home.
Second, no American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas. From now on, every multinational company should have to pay a basic minimum tax. And every penny should go toward lowering taxes for companies that choose to stay here and hire here.
Third, if you’re an American manufacturer, you should get a bigger tax cut. If you’re a high-tech manufacturer, we should double the tax deduction you get for making products here. And if you want to relocate in a community that was hit hard when a factory left town, you should get help financing a new plant, equipment, or training for new workers.
It’s time to stop rewarding businesses that ship jobs overseas, and start rewarding companies that create jobs right here in America. Send me these tax reforms, and I’ll sign them right away.

 Just as he decried the uneven playing field that countries like China have created by undervaluing their currency, he advocated the use of the tax system to provide credits and government subsidies to industries (particularly in the clean energy and advanced technology sectors) as a way of ensuring that America was "built to last". All this was part of the solution in addressing what he called "the defining issue" of his presidency--keeping the American dream alive.

Well, well, well, it seems that Washington is no longer enamored with the Washington Consensus. As it pushes for free trade agreements across the globe to lower trade barriers for its products and to enforce the intellectual property rights of its companies, it is clear that the administration has no qualms about engaging in market interventions at home to boost the competitiveness of its local industries.

Is Too Much Regulation or Too Much Innovation Responsible for Killing Jobs?

Earlier this year, Tyler Cowen suggested that the Great Stagnation in productivity and incomes observed recently in the West primarily in the United States has been occurring since the 1970s and is a result of it having exhausted the "low-hanging fruit" of innovation.

An opposite case can also be made that too much innovation has led to this slowdown. The Economist through its science and technology blogger comments on the practical advances occurring in the field of Artificial Intelligence or AI:

Today, automation is having an impact not just on routine work, but on cognitive and even creative tasks as well. A tipping point seems to have been reached, at which AI-based automation threatens to supplant the brain-power of large swathes of middle-income employees.

The pace of technological progress rather than having slowed down, appears to be speeding up. So much so that as "capital becomes labor" in many industries, leading to cheaper goods and better products, income growth for workers has stagnated while corporate profits have soared.

Advanced manufacturing, financial engineering, creative industries and even mining no longer require as much labor as their first wave cousins might have. Yet to attract such industries, governments have had to cut taxes, lower regulatory hurdles and so forth. This in turn has led to more constrained fiscal spending on their side.

The one area in which more regulation has led to greater innovation is that of climate change and environmental policy. The White House under the Democrats has elected to shelve its proposed cap-and-trade scheme in favor of greater powers for its Environmental Protection Authority to promote greater air quality for the health of its citizens.

The increased restrictions on the carbon emissions of power generators is causing a shift away from carbon intensive coal fire plants in favor of gas fired stations. The adjustment into a low carbon economy is creating just about as many jobs as it destroys according to economists.

Whether or not regulation encourages or discourages jobs however is beside the point, as one Stanford policy expert was quoted by the Washington Post as saying. The adoption of regulation should be based on whether it benefits society, he says. I couldn't agree more.

China's Hard Landing: Is it around the bend?

Last June, I speculated that a hard landing in China might be around the bend. That was even before the US downgrade and EU debt crisis unfolded. Now it seems the events of 2007 culminating in the collapse of Lehman the following year and the global stimulus in response to the North Atlantic crisis that followed may have returned to bite the People's Republic.

Reports of China's heavy handed treatment of foreign companies, defaults on loans and a slowing property market are developing into a credible narrative. Doomsayers like Rhoubini and Chanos have spoken. They predict the hard landing is on its way. Meanwhile confidence in China still remains strong with the EU looking east for help in financing its stability fund and Australia still expecting to profit from this Asian economy's thirst for iron ore and other mineral deposits as it did during the last global downturn.

What happens next depends on the ability of China's authorities to handle the current softening of global demand for its exports. Back in 2008, it engaged in a massive fiscal stimulus program. The unwinding of that stimulus is what gives the impression to many that it was headed for a soft landing. It can very easily turn the tap back on if the situation deteriorates. Their effectiveness at reading the situation will determine whether it has a soft or hard landing.

Does anyone deserve to be poor?

The Nobel winning economist, Gary Becker, whose work on human capital I deeply admire writes a piece called Deserving and Undeserving Inequality in the blog which he shares with Richard Posner. In it he distinguishes between good inequality (deserved) and bad inequality (undeserved) saying

The great majority of people in different cultures do not object to someone who has made lots of money when they have superior abilities and talents, and they work hard at producing what are considered useful goods or services.

The meritocratic society with upward and downward social mobility would be in Becker’s view the most acceptable form. In this just society, the cream always rises to the top. He cites actors like Tom Hanks and Jennifer Anniston, entrepreneurs like Bill Gates and Steve Jobs, and skilled professionals like transplant surgeons who have grown rich by applying their exemplary talents and skills.

In contrast, Becker poses the problem society seems to have with hedge fund managers who make use of arbitrage (momentary bargains unnoticed by the market) to make huge sums of money. He lumps them together with speculators, Russian oligarchs and monopolists who enrich themselves through unfair, uncompetitive means (the latter two through government fiat).

Becker of course uses human capital theory as his framework for addressing this issue. Under its framework, individuals who acquire knowledge and skill through education and training (one cannot gain it any other way as it cannot be inherited or passed on) deservedly earn private returns in the form of higher incomes over the remainder of their working lives.

A meritocratic society should in Becker’s view reward the investments made by individuals in themselves and not rely on some other criteria. Elitism, the polar opposite of meritocracy rewards individuals for investing in other things (social standing or being raised on the right side of the tracks, marrying into the right family, etc).

It all sounds rational and justified, which is why Becker says “the great majority of people in different cultures” accept the legitimacy of a certain form of inequality. The wisdom of crowds is evident, until we start to consider the actual “merit” of the argument.

Economic, behavioral and neuro scientific research has demonstrated for instance that when it comes to employment, so many other factors aside from talent and intelligence determine the outcome of a hire/fire decision. Tall, handsome, Caucasian males for instance tend to earn more than their peers of equal and (as labor economist Daniel Hamermesh demonstrates) of even higher educational attainments.

If you are a plump woman working alongside office waifs, then you are more likely to be laid off during an economic downturn compared to your skinny female counterparts. In fact, studies in the US and replicated in other parts of the world show that job applicants could even be screened out simply because their names sound ethnically diverse (those with names such as ‘Tamika’ for instance got less callbacks from recruiters compared to those who had typically Anglo-Saxxon names like ‘Sally’).

The ‘good-bad’ dichotomy looks awefully strained at this point.

Reflecting on this a bit, I begin to wonder, how much of our lot in life really depends on our own actions, and how much of it depends on chance. In fact, beyond just the narrow hedonic enjoyment of earning more money, if the pursuit of happiness were to be the ultimate measure of success, then we could find an even bigger divide opening up.

About 50% of our ability to have a pleasant life depends on our genes, which is not very modifiable, according to psychologist Martin Seligman (other studies suggest this could be as much as 60%). This would not be good for those who weren’t born with the right disposition.  Of course, for those who are disadvantaged in this way, they can still influence their level of happiness by focusing on the residual aspects of life that can be modified to produce happiness, a mere 15-20%. That is if they can afford to pay for therapy which again disadvantages those who happen to be residing at the bottom of the economic ladder.

As James Kwak who recently re-read John Rawls’ A theory of Justice, has said

well-educated, hard-working people did not deserve to make more money than other people, at least not as a normative (as opposed to a utilitarian) matter.

Kwak quotes the passage from Rawls’ treatise to support his claim

[The liberal conception of the second principle of justice] still permits the distribution of wealth and income to be determined by the natural distribution of abilities and talents. Within the limits allowed by the background arrangements, distributive shares are decided by the outcome of the natural lottery; and this outcome is arbitrary from a moral perspective. There is no more reason to permit the distribution of income and wealth to be settled by the distribution of natural assets than by historical and social fortune. . . . Even the willingness to make an effort, to try, and so to be deserving in the ordinary sense is itself dependent upon happy family and social circumstances.

At work, I am currently involved in developing and implementing a pilot project that seeks to help socially disadvantaged groups improve their learning and employment outcomes through a range of interventions. Social disadvantage comes in many forms. The issues encountered by our case officers usually involve multiple and complex needs such as drug and alcohol abuse, inter-generational poverty, lack of economic opportunity where they live, sexual abuse, abandonment, domestic violence, discrimination, disability both physical and mental.

Unfortunately much of Australian mainstream society sees these individuals as “bludgers” or people who leech off the tax and welfare system. The mainstream of society cannot really see why they can’t just find work in a country where there are skills shortages in many industries. I must admit, I used to subscribe to this way of thinking too.

This is reflective of meritocratic aspirations Aussies share with their American and British counterparts. A study by Dan Ariely and featured recently by PBS finance correspondent Paul Solman demonstrates this. Respondents were given three pie charts resembling the spread of wealth in unnamed countries. The first showed an equal distribution of wealth. The second showed a slight advantage to the two top quintiles. The last showed a very disproportionate concentration of wealth to the top 40%.

They were asked to specify which country they thought the US represented. Most went for the pie chart that showed a slight skewing of wealth to the upper classes. They were unaware that it was actually the third chart which they thought represented a third world country which represented the US. And yet, as the piece by Solman suggests, there is a lack of appetite among voters for tax reforms that would correct such a lopsided distribution of income and wealth.

At least in affluent countries, there is a system for attending to marginal groups. In less developed countries, the problem of addressing poverty, inequality and social disadvantage is harder because of scarce resources. Even in countries like China and India which have lifted millions out of poverty, this mostly depends on where people live. Those who reside along coastal provinces in China tend to have higher incomes than those that live in the interior whose incomes are closer to some countries in Sub-Saharan Africa.

In a middle income country such as the Philippines that has experienced growth but not a lot of change in its distribution of wealth, the experience has been that such growth has not been inclusive. Not only is economic opportunity not evenly distributed in the population, but this distribution itself seems to be perpetuated by laws and policies of successive governments.

I say this because the sorts of reforms that have been proposed to address disadvantage, namely tax reform, land reform, and reproductive health have been held back or denied the kind of support, moral, political, and financial, required for them to be implemented correctly. There are two kinds of attitudes that might be responsible for this:

1. Self serving bias is the tendency to claim more responsibility for successes than failures. Thus, those who are well-off tend to think they deserve their successes.
2. Just world phenomonon is the tendency for people to believe that the world is just and therefore people "get what they deserve." So those who hold this belief look at poverty and social inequality and think that those who suffer from them deserve to be where they are.

These forms of ‘cognitive bias’ may lead us to misapprehend the problem of social disadvantage and inequality to the point that we may even claim self-righteously that certain outcomes are just when in fact they are not. I certainly have come to reconsider my views on this. What about you? 

London Burning

No matter how hard he tries, David Cameron's attempts to evade responsibility not just for the conditions that may have caused or contributed to the eruption of riots in London, but also the inadequacy of the response to it, it is becoming apparent that not only politicians, but the public at large are losing faith with his reforms and the Big Society it promises.

Cameron of course, beset by calls from the Labor Opposition to reconsider cuts to the police budget laid the blame on parents and the so-called broken society. The rioting was criminality run wild, not a form of political protest against an unjust social order. The police response was slow and tactically wrong, he intoned during parliamentary debates.

Unfortunately for him, the police did not take too kindly to this characterization of events, and the public appear to back them instead of the political leaders. The seeming disconnection of the politicians who were on holiday, the PM in Tuscany, his deputy in France and the London Lord Mayor Boris Johnson in the United States, when the burning of London raged surely did not help build credibility for them.

In this situation, the importance not only of empathy but also a desire to ease suffering on the part of ordinary citizens could have gone a long way.

China Before the Fall?

There is somethings seriously wrong with this picture:

China's dependence on investment (accounting for almost half of its economy in 2009) means that any slowdown in investment will lead to something akin to a "hard landing" in the West (an abrupt correction of monetary and fiscal policy leading to a contraction). Having experienced double digit growth since the 1980s, a hard landing in China would mean less than stellar growth of 7-8% triggering higher unemployment. Nouriel Roubini who warned investors against US sub-prime mortgages has predicted with "meaningful probability" that this slowdown of investments will occur in 2013.

Back in 2008/09, China got a foretaste of what is to happen when it grew by a mere 6.6% in the first quarter and consequently saw 20 million migrant workers in urban centers losing their jobs. The stimulus measures put in place to boost domestic consumption and investment might be coming back to bite the economy with much of this spent on redundant infrastructure (as Nouriel Roubini noticed when he took the hi-speed train from Shanghai recently) or lent to local governments and state owned companies leading to a property and debt bubble.

One phenomenon that has come out of this are the so-called ghost towns built by local governments with stimulus lending. Andie Xie, former chief Asia economist for Morgan Stanley has called China's stocks a big ponzi scheme and warns of either a US or Chinese crash in 2011.



Indeed investors have begun to question the sound governance of Chinese companies. Another leading indicator is inflation. With Premier Wen Jiabao now hinting that it cannot be contained within the government target of 4 percent, meaning that the government is unwilling to lift interest rates in the near term fearful of the effects that would have on growth, the scene is set for an abrupt correction of policy settings leading to a hard landing.

Of Wedding Feasts and Famines

In the media-driven frenzy of royal-watching, the wedding between Kate and Wills harks back to a time when the pomp and pageantry of the monarchy provided a diversion from the daily struggles of their subjects. In England, as late as the 1930s, poor families struggled with the problem of hunger. Yet as George Orwell wrote, 

The basis of their diet, therefore, is white bread and margarine, corned beef, sugared tea and potatoes -- an appalling diet. Would it not be better if they spent more money on wholesome things like oranges and wholemeal bread or if they even, like the writer of the letter to the New Statesman, saved on fuel and ate their carrots raw? Yes, it would, but the point is that no ordinary human being is ever going to do such a thing. The ordinary human being would sooner starve than live on brown bread and raw carrots.

The May/June 2011 online version of the magazine Foreign Policy is devoted to the problems associated with food price inflation and the impact this would have on poverty and hunger. The development aid community has flagged this as a potential cause for dragging many in the middle to low income countries into poverty.

Calls have been issued to address this pressing problem. But in a piece written by Abhijit Banerjee and Esther Duflo, the general consensus regarding the issue is challenged. What if the experts are wrong, they ask.What if the problem of hunger is not caused by the lack of affordable food? Nobel Prize winning economist Amartya Sen has famously pointed to the fact that famines have only occurred in recent times in countries that lacked democratic institutions of accountability. Poor governance rather than a lack of food supply creates extreme hunger.

In India where Sen is from, despite the rise in per capita income, per capita caloric intake has declined. The piece points out that

(t)he change is not driven by declining incomes; by all accounts, Indians are making more money than ever before. Nor is it because of rising food prices -- between the early 1980s and 2005, food prices declined relative to the prices of other things, both in rural and urban India. Although food prices have increased again since 2005, Indians began eating less precisely when the price of food was going down.

What if the problem of hunger is not driven by a lack of affordable food, but the fact that the poor demand a different variety of food? They use one example to bear this out:

Using price data from the Philippines, we calculated the cost of the cheapest diet sufficient to give 2,400 calories. It would cost only about 21 cents a day, very affordable even for the very poor (the worldwide poverty line is set at roughly a dollar per day). The catch is, it would involve eating only bananas and eggs, something no one would like to do day in, day out. But so long as people are prepared to eat bananas and eggs when they need to, we should find very few people stuck in poverty because they do not get enough to eat.

To provide more evidence of this, they cite a study conducted in two regions of China where researchers offered randomly selected poor households a large subsidy on the price of basic staples believing this would result in greater consumption of food. Instead they found that:

(o)verall, the caloric intake of those who received the subsidy did not increase (and may even have decreased), despite the fact that their purchasing power had increased. Nor did the nutritional content improve in any other sense. The likely reason is that because the rice and wheat noodles were cheap but not particularly tasty, feeling richer might actually have made them consume less of those staples. 

They go on to point out the possible reasons why the poor might be eating less. Better water and sanitation for instance may lead to a lower incidence of nutrition depleting diseases. Women in rural villages which now have access to water no longer need to spend a good deal of effort fetching water to and from rivers. Aside from that is the penchant of the poor to spend on non-essentials like vices and other forms of entertainment (televisions, DVDs, mobile phones, movies, etc).

Many programs aimed at boosting protein and iodized salt intake have been met with a dismal response from poor households. It seems that when it comes to deciding what to spend their income on, they seem to have other priorities.