Time to Make a Deal on the Federal Minimum Wage [feedly]

Time to Make a Deal on the Federal Minimum Wage
https://workingclassstudies.wordpress.com/2019/01/14/time-to-make-a-deal-on-the-federal-minimum-wage/

The federal minimum wage has been stuck at $7.25 per hour since 2009.  Until last year, when the unemployment rate dropped almost to the level of full employment, wages were stagnant, exacerbating inequality.  In 2018, average hourly earnings went up 3.15% and closed the year with a 3.9% jump.  Even with those recent adjustments, workers still need a federal minimum increase.

The Raise the Wage Act offers the prospect for change.  The bill was introduced in May 2017 by Rep. Bobby Scott (D-VA), the ranking Democrat on the House Committee on Education and the Workforce, but it died in committee in 2018 with 170 co-sponsors, Democrats all.  It proposed a dollar-a-year increase over seven years, eventually reaching $15.00 – more than twice the current minimum.  It would also phase out lower pay for tip-credit workers who are currently frozen at $2.13 per hour as well as disabled worker exceptions.

The Fight for $15 campaign, largely engineered and financed by the Service Employees International Union, has been a key force in defining $15.00 an hour as the goal.  Their work has helped set eight states on the path to establishing minimum wages of between $12 and $15 per hour in coming years, including Arizona, California, Colorado, Maine, Massachusetts, Minnesota, New York, and Washington.  Thirteen cities, including New York City, Seattle, and San Jose, are already at $15 or higher.  While Fight for $15 has created momentum for the new Democratic House majority, today's leaders should not forget the lessons learned from decades of living wage fights.

On January 18, 1997, ACORN and Local 100, United Labor Unions (then affiliated with the SEIU), presented voters in Houston, Texas with what seemed a radical proposal at the time: a city ordinance to raise the minimum wage to the level of $6.50 per hour for all workers.  Only months before, the federal minimum had finally risen from $4.25 per hour to $4.75.  In a patronizing campaign against us, service industry and general business employers insisted that they understood our demand, but we were going about it the wrong way, and our proposal would cost jobs.  While we won in lower-income and working-class districts, we lost the election 2 votes to 1. In River Oaks, the district where former President George H. Bush lived and voted, we garnered just one vote.

Soon after, ACORN put a similar proposal before Denver voters, asking them to approve a minimum wage of $6.25.  An expensive, blunt force campaign in the final two weeks by the hotel and restaurant association and fast food operators swamped us. Again, we lost two to one loss even as we swept black and brown, lower income, and working precincts throughout the city.

We learned a key lesson from those losses: do the research. In Arizona, Michigan, Florida, and Ohio, we used polling to find out the rate that would gain support from at least 60% of voters. When we did that, even strident corporate campaigns didn't block our way. Where we couldn't do polling, we pegged the increase more modestly as a premium above the federal minimum, usually one dollar, which won in New Orleans, Missouri, and elsewhere. Once we learned to propose acceptable target rates, we won many more votes, and no living wage statewide proposition has lost at the ballot box in more than a dozen years. Between 1996 and 2008, we won more than 125 "living wage" campaigns around the country, delivering billions of dollars' worth of raises to millions of workers. Where we won increases indexed to cost-of-living, like Florida, lower-waged workers continue to benefit.

State and local minimum wage and living wage campaigns have continued in full force and fury.  Approximately twenty states and twenty-three localities now have higher base hourly wage rates than the federal standard, and some 5.2 million workers began this year with a wage increase. Individual bumps in annual pay from $90 to $1300 add up to about $5.4 billion of increased income for workers. This is good news. But workers in twenty-nine states – about 2.2 million people — are still stuck at $7.25 per hour – or less!

It's time to make a deal.

Reportedly, Democrats believe they now have enough votes to pass something like the Raise Wages Act and demand that the Senate either support, negotiate, or reject raising workers' wages.  We need to force politicians to finally deliver, whatever the intraparty polarization and squabbles.

We also need to remember the lessons from the past.  In Houston, Denver, and initially New Orleans, we lost support when we proposed raising the minimum 37% over the existing federal standard.  To get to $15 on a fast track would be a jump of more than 100%, doubling the minimum wage.  Pew Research found only 52% support for that big an increase.

It's just not likely to happen all at once.

Even raising the minimum $1 per year is steep and unprecedented. The last ten-year freeze of the federal minimum, between 1997 and 2007, the raise was seventy cents annually for three years l.  A dollar per year for seven years will be hard to win.

But low wage workers need a deal, and at this point, just about any raise would do. Fifty more cents an hour for a full-time, 2080 hours a year worker is over $1000.  Sure, a dollar would be even better, but any raise would be a godsend. This would be even better if we could finally win some form of automatic indexing for future increases and at least lift the cap on tipped workers' wages.  Both of those adjustments would be worth paying some real money to achieve at the negotiating table.

Does making a deal hurt the states and cities that are already over the federal minimum wage?  No, indeed.  As President John F. Kennedy argued, raising the minimum wage "lifts all boats," because workers making $10 or $12 an hour would fight to keep their hourly wages a few dollars higher than the minimum wage. If employers want to keep those workers, they will have to pay more.

Of all of the divisions in the United States now, the wage gap might be easiest to attack.  Even Republicans feel the pressure as the 2020 election comes into view. We need to make it hard for them to defend keeping the minimum wage at $7.25 an hour.  They will argue that $15 an hour is catastrophic, and we must be prepared to fight back. Republicans may not like bargaining over a hike in the minimum wage, but other than the stone-cold ideologues, some of whom are in the White House, they will be ready to do so.

It's time to demand an increase in the federal minimum wage but also to talk realistically about the terms of an agreement.  Lower wage workers must have a raise, and they need it now. We can't wait for a new President or a new Congress.

Wade Rathke

 -- via my feedly newsfeed

Opportunity Zones: Can a tax break for rich people really help poor people? [feedly]

Progressive trickle down? The Chinese BRI -- isn't this their model? And the fascist billionaires want to go to war over that.

Opportunity Zones: Can a tax break for rich people really help poor people?
https://www.washingtonpost.com/outlook/2019/01/14/opportunity-zones-can-tax-break-rich-people-really-help-poor-people/

Progressive economists, myself included, have been highly critical of the 2017 tax law, as it will surely deepen income inequality and starve the Treasury of needed revenue. But there is a measure in the law that has the potential, if well implemented — a big "if" — to actually help low-income people. I'm talking about Opportunity Zones.

There's no evidence that simply giving rich people more after-tax income helps those with fewer means. If this new idea works, it's because it incentivizes those with capital gains to reinvest their returns in places starved for capital investment.

Let me explain, and then talk about what could go right and wrong with this new tax policy.

When an investor sells an asset, she pays a tax, typically at a rate of about 24 percent, on the asset's appreciation, i.e., its capital gain. But if she taps this new incentive, she can diminish her liability by putting the gain in a fund dedicated to investing in disadvantaged areas certified as Opportunity Zones (OZs). The longer she leaves the investment in place, the bigger the tax break on both the original capital gain and on the returns from the investment itself (see here for details).

OZs don't assume that just because they get a tax cut, wealthy people will make investments that will somehow lead to higher incomes for others. The tax break is conditioned on investing in economically left-behind places where patient, equity capital is a scarce commodity. To push back on sheltering risk, investors can't just park their deferred gains in OZs. They must be used to build new homes or businesses, finance new or expanding companies in the zones, or substantially rehabilitate preexisting structures and/or businesses.

As an early contributor to this idea, I was motivated by two realities. One, the United States is fraught with capital scarcity in most places amid race/gender unbalanced capital accumulation in just a few places. The vast majority (over 75 percent) of venture capital goes to white male founders in Massachusetts, New York and California. Two, it is increasingly well understood that the facile economic solution to being stuck in a depressed area — move to a better place! — isn't working. Diminished geo-mobility has left too many families in places with too little opportunity. If policy is going to help them, it needs to bring jobs and investments their way.

It is inconceivable that a few white guys in three states are the only people and places where untapped potential exists. Instead, I'm sure the status quo underinvests in the future of ailing regions and less-advantaged demographics. Hence the bipartisan backing the Opportunity Zones idea garnered in both chambers of Congress before it was wrapped into the tax overhaul package.

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It's too soon in the life of OZs to evaluate actual investments, but we can examine some critical, early developments, including the zone certification process, market reactions and some early, proposed investment targets. Such monitoring is essential if we want OZs to realize their potential to help left-behind places and people, vs. them turning into another wasteful, ineffective, place-based tax break.

A good place to start is the outcome of the certification process, wherein governors designated over 8,700 OZs across all 50 states, the District, and U.S. territories (almost all of Puerto Rico received designation to aid disaster recovery) to receive tax-favored investments. Eligibility criteria include places with above-average poverty rates and below-average incomes.

According to the Economic Innovation Group, a D.C. policy organization closely associated with OZs (I co-chair EIG's research advisory board), the average zone has a 29 percent poverty rate — nearly twice the national rate — and a median family income of $42,400, nearly 40 percent lower than the national median of $67,900. EIG finds that more OZ adults lack a high school diploma than have earned a bachelor's degree. Likewise, on jobs, housing and life-expectancy measures (almost four years shorter among zone residents), OZs paint a picture of economic distress and disinvestment.

In Louisville, for example, the 19 certified OZs have a poverty rate of 43 percent compared with 14 percent for its metro area. Median income is $22,000 in the zone compared with $52,000 in the metro area; over half of zone residents are African American compared with 14 percent metro-wide residents.

However, some high-profile zones were poorly chosen, raising the risk of subsidizing places that are already on a stable footing. Exhibit A is the zone chosen for one of Amazon's second headquarters in Queens. Not only will this area already receive over $1 billion in tax credits and subsidies from the deal local governments struck with Amazon, it also is considerably more prosperous than the typical zone. Its choice was a function of a glitch in the law that allows governors to nominate up to 5 percent of better-off places next to low-income ones. EIG found that governors used this discretion sparingly; it was tapped by less than 3 percent of OZs. Other, independent research found less than 4 percent of chosen tracts showing signs of gentrification before nomination. Still, even while these are small percentages, such leakage undermines the intent of the program and wastes valuable tax revenue. It is also possible that such places could absorb disproportionate shares of OZ investments.

That said, given that most zones appear to be well chosen, what kind of investments might follow?

To answer this question, I looked at a few of OZ investment prospectuses starting to come out, and I urge fellow skeptics to do the same. There's evidence that governors worked with mayors to designate zones, and many mayors are now leading the charge to steward investment into their communities. One such case is Oklahoma City, which chose the 23rd Street Corridor, long a commercial and cultural hub at the core of the city's African American community. In 2014, the city government designated the area as "blighted," but development plans have foundered for lack of patient capital. Residential housing, retail (including a much-needed grocer), and health facilities are all featured options in their OZ prospectus. Similar ideas are in motion for Park DuValle neighborhood in Louisville, and the Civil Rights District in Birmingham, Ala. In Boulder, Colo., stakeholders are coming together to figure out how their local OZ can be used to address the city's lack of affordable housing, a problem that has long kept low-income families from living close to work.

Yes, such investments invoke gentrification risk. It is not for nothing that James Baldwin relabeled the 1960s urban renewal as "Negro removal." But unlike the federal projects of that era, OZs and their investment funds have zero power to override local rules. As columnist Jan Burton said about the Boulder initiation, "We control our zoning and land use decisions, and we retain the long-standing 1 percent per year growth limit on housing units. We control our own future."

I'm keeping my powder dry on this one. If OZs turn out to largely subsidize gentrification, if their funds just go to places where investments would have flowed even without the tax break, or if their benefits fail to reach struggling families and workers in the zones, they will be a failure (my Center on Budget and Policy Priorities colleagues raise these and other concerns about OZs). Moreover, when it comes to anti-poverty policy, readers of this column know my preference for direct hits vs. bank shots. The most direct ways to help those left behind is to guarantee them jobs, incomes, housing and health care. The direct way to improve infrastructure in poor neighborhoods is for public projects to build it.

But the fact is that most OZ communities have faced disinvestment and depopulation for so long, they have both the need and capacity to absorb new investment, development and people without displacing local residents. And our politics is such that we're living in a second-best world. At the same time, the inequality of our era means there are trillions of dollars in idle capital sitting on the sidelines over here, and communities suffering from decades of disinvestment over there. As Bruce Katz, a longtime regional development expert told me, "For a lot of these places, Opportunity Zones represent the last and best chance to drive a new economic vision."

Thus, I suggest we give OZs a chance, while scrutinizing their progress. That will require the Treasury to dictate strong reporting requirements that will accommodate thorough evaluation. As I've stressed, my support for the idea is conditional on such data and what they show (my biggest concern is that the Treasury fails to collect the tracking data needed to evaluate relevant outcomes). I'm enthusiastic, not naive, and the last thing we need in this country is a new way for investors to shelter capital gains. But we have a pressing need to channel lasting, opportunity-creating investments to people in left-behind places, and OZs might just meet that need.
 -- via my feedly newsfeed

1789, the return of the debt [feedly]

1789, the return of the debt
http://piketty.blog.lemonde.fr/2019/01/15/1789-the-return-of-the-debt/#xtor=RSS-32280322

One of the ideas raised by the yellow vests is the possibility of a referendum on the cancellation of the public debt. For some, this type of proposal, already heard in Italy, demonstrates the extent of the 'populist' danger: how can one possibly imagine not repaying a debt? In reality history shows that it is customary to resort to exceptional solutions when the debt reaches this type of level. However, a referendum would not enable us to solve such a complex problem. There are numerous ways of cancelling a debt, with very different social effects. This is what should be discussed instead of leaving these decisions to others and to the forthcoming crises.

To ensure that everyone can make up their minds, I am going to give two sets of information here. The first concerns the present European regulations; then I will turn to the way in which debts of this size have been dealt with in history.

Let's begin with the European regulations which are not well known and have generated a certain amount of confusion. Many people continue to refer to the '3% rule' and do not understand why Italy, which was considering a deficit of 2.5% of GDP, before agreeing to a compromise of 2%, has been blacklisted. The explanation is that the Maastricht Treaty (1992) was amended by the new budgetary treaty adopted in 2012. Its real name is the Treaty for Stability, Coordination and Governance (TSCG). This text stipulates that henceforth the deficit must not exceed 0.5% of GDP (Article 3), with the exception however of the countries whose debt is 'significantly less than 60% of GDP' in which case the deficit can rise to 1%. Barring 'exceptional circumstances' the non-observance of these rules leads to automatic penalties.

We should point out that the deficit targeted by these texts is always the secondary deficit, that is, after payment of interest on the debt. If a country has a debt equal to 100% of GDP and the interest rate in 4% then the interest will be 4% of GDP. To achieve a secondary deficit limited to 0.5%, a primary surplus of 3.5% of GDP is required. In other words, taxpayers will have to pay taxes which are higher than the expenditures benefitting them, with a difference of 3.5% of GDP possibly for decades.

The TSCG approach is not illogical: if we choose not to cancel the debt, and if we have almost zero inflation and limited growth, then only huge primary surpluses can reduce debts in the range of 100% of GDP. However the social and political consequences of this type of choice have to be considered.

Although they have been reduced by the unusually low rates which will perhaps not last forever, at the moment interest payments stand at 2% of GDP in the Euro zone (the average deficit is 1% and the primary surplus 1%). This amounts to over 200 billion Euros per annum, which one can compare for example with the miserable 2 billion per annum invested in the Erasmus programme. This is a possible choice, but are we sure that it is the best one to prepare for the future? If similar amounts were devoted to training and research, then Europe could become the leading pole of innovation at world level, ahead of the United States. In Italy, the interest payments represent 3% of GDP, or 6 times the budget for higher education.

What is certain is that history shows that there are other ways of proceeding. One example often quoted is the big debts of the 20th century. Germany, France and the United Kingdom all found themselves with debts ranging from 200% and 300% of GDP in post-World War Two which have never been repaid. Their debts were written off in a few years by a mix of cancellation pure and simple, inflation and exceptional taxation of private property (which is the same thing as inflation, but is more civilised: the rich can be made to pay more and the middle class protected). The German external debt was frozen by the London Debt Agreement in 1953, and then definitively written off in 1991. This is how Germany and France found themselves with no public debt and able to invest in growth in the years 1950-1960.

However, the most relevant comparison is the Revolution in 1789. The Ancien Régime was unable to force its privileged classes to pay taxes and had accumulated a debt of approximately one year of national income, even a year and a half if the sale of charges and offices (official posts and functions) are included (these were a way for the State to obtain money immediately in exchange for the future revenue to be collected from the population). In 1790, the Assembly obtained the publication of the list of names in the Grand livre des pensions which contained both annuities to courtiers, as well as payments to former senior officials, with payments ten or twenty times higher than the average income, which created a scandal (the comparison with the salary of the President of the National Commission for Public Debate springs to mind). It all ended with the setting up of a somewhat fairer form of taxation and above all, the bankruptcy of two-thirds of those named and a major inflation of the assignats or promissory notes.

In comparison the present situation is both more complex (each country holds a part of the debt of the others) and more simple: we have, with the ECB, an institution which enables us to freeze debts and we could adopt a fairer system of European tax system by finally setting up a sovereign Assembly. But if we continue to explain that it is impossible to make the richest Europeans pay and that only the immobile classes have to pay, then inevitably we run the risk of facing serious rebellions in the future.

 

PS. On current debt interests and primary surplus in the euro zone, see Economic Bulletin ECB December 2018, p.36, Chart 27, and  p.S23-S25. On the schedule of Italian debt interest payments, see  Italy Governement Securities, Debt Service(ECB Statistical DataWarehouse)

PS2. On the history of debt in 18th-20th centuries, see for instance Capital in the 21st century, 2014, chapters 3-5; for complete series, see this article published in QJE 2014 and its appendices.

 -- via my feedly newsfeed

Tim Taylor: What if Most Americans Don't Care That Deeply about Trade? [feedly]

"The Tribute that Vice Pays to Virtue"

What if Most Americans Don't Care That Deeply about Trade?
http://conversableeconomist.blogspot.com/2019/01/what-if-most-americans-dont-care-that.html

"In fact, recent public opinion polling uniformly reveals that, first, foreign trade and globalization are generally popular, and in fact more popular today than at any point in recent history; second, a substantial portion of the American electorate has no strong views on U.S. trade policy or trade agreements; third, and likely due to the previous point, polls on trade fluctuate based on partisanship or the state of the U.S. economy; and, fourth, Americans' views on specific trade policies often shift depending on question wording, especially when the actual costs of protectionism are mentioned. These polling realities puncture the current conventional wisdom on trade and public opinion—in particular, that Americans have turned en masse against trade and globalization ..."

Thus argues Scott Lincicome in "`The "Protectionist Moment' That Wasn't: American Views on Trade and Globalization," written as an installment of the Free Trade Bulletinfrom the Cato Institute (November 2, 2018).

If you disagree with the statements above, your disagreement isn't with Lincicome (or with me), it's with the array of polling data that Lincicome presents. For example, on the issue of how Americans feel about trade: 

• Pew (May 2018) found that American support for free trade agreements rebounded to pre-2016 levels, only a couple percentage points off its all-time high in 2014.
• WSJ/NBC News (March 2018) found "Americans overwhelmingly think trade is more of an opportunity to boost the economy than it is a threat to it . . . by a 66%–20% margin. And that feeling transcends party lines, as Republicans, independents and Democrats agree that foreign trade is an opportunity for economic growth."
• Gallup (March 2018) found that "[a] strong majority of U.S. adults (70%) see foreign trade as an opportunity for U.S. economic growth through increased exports rather than a threat to the economy from foreign imports (25%)"—down from an all-time high in 2017 of 72 percent. Before that, "no more than 58% had held the positive view of trade."
• Monmouth (June 2018) found that 52 percent and 14 percent, respectively, of Americans in 2018 think that "free trade agreements are good or bad for the United States" up dramatically from 24 percent good and 26 percent bad in November 2015.

But perhaps the deeper lesson of the polling data seems to be that American opinions about free trade do not seem especially strong or robust. For example, my own guess is that some of the rise in support for trade is a reaction against President Trump's anti-trade rhetoric and policies--but that some of the same people who express support for trade now could switch sides if tariffs were imposed on imports by a politician or party that they supported.  

This figure shows the range of opinions from "very strong opposition" to "very strong support" on a range of issues. The black line shows that a much larger share of the opinions about trade are in the "neither favor or oppose" category than is true for the other issues.

Also, while it's always true that the phrasing of questions in a survey will affect the results, this affect seems especially strong on trade issues. Here are a couple of examples from Bloomberg surveys. If you ask a trade question like this, you get a strongly protectionist answer: 

"Generally speaking, do you think U.S. trade policy should have more restrictions on imported foreign goods to protect American jobs, or have fewer restrictions to enable American consumers to have the most choices and the lowest prices?" 

But if you ask a trade question like this, you get a strongly free trade answer:

"Are you willing to pay a little more for merchandise that is made in the U.S., or do you prefer the lowest possible price?"

This difference also seems to reflect actual consumer/voter behavior. American may cheer for politicians who promise "to protect American jobs," but they aren't very eager to pay actual higher prices to make this occur. Lincicome summarizes the evidence this way:

"[P]rotectionist policies emanating from the United States government today are most likely a response not to a groundswell of popular support for protectionism but instead to discrete interest group lobbying (e.g., the U.S. steel industry) or influential segments of the U.S. voting population (e.g., steelworkers in Pennsylvania). Protectionism therefore remains a classic public-choice example of how concentrated benefits and diffuse costs can push self-interested politicians into adopting polices that are actually opposed by most of the electorate."

It's interesting that President Trump has a number of times defended his protectionist policies as a necessary negotiating step to greater free trade. From a trade policy perspective, this justification is the tribute that vice pays to virtue.  

 -- via my feedly newsfeed

How BRI poses risks to 21st-century geopolitical landscape [feedly]

How BRI poses risks to 21st-century geopolitical landscape 

By ANU ANWAR 

Moderator:

Union organizers are used to having insufficient information to reach a 'scientific' conclusion  about what a company can afford, and what it cannot. As Walt Pellish, a industrial relations manager with years of (anti) Union experience admitted to me: "Of course we lie!" 

Consequently they are compelled to resort to pressure tactics whose principle goal is to find out how deep the lies told to employees go.  Always start by testing the positions toward which the company shows the most animus, or where the lies appear the fattest. The truth is often hidden there. 

This is how I approach the Chinese Belt and Road Initiative, an alternative to both the colonial, and neo-colonial global development approaches of the UK in pre, and the US in post, WWII eras. The Brits set up colonies and a fairly effective administrative apparatus to primarily extract natural resources. But they drank too much gin (as Gandhi commented). After WWII tore up the UK empire, Roosevelt declined Churchill's request to use US troops to protect British colonies. 

But Roosevelt died. Subsequently, the US bought anti-communist, anti-socialist, anti-democratic dictators with guns (to kill opponents) and cash (to keep them 'loyal') for the same extractive objectives, to which was added the call to destroy the USSR, socialism, and social-democracy too. The anti-colonial, and anti-neo-colonial revolutions of the post war era crushed neo-colonialism in Vietnam --  as the most powerful military in history was defeated by a 'peoples army' of a backward country. We have been in decline ever since. And now we are lost, and have forgotten who we are.

I assume, first, that Trump is a liar and an enemy of MY interests. Therefore if he hates something, it might be a good thing, or, at least, some leverage to put him and his fascist ilk back to his Russian or Saudi lenders for good -- or the gallows, if he can ever be made to stand trial for his capital crimes.

The essential differences in the Chinese approach, as far as I have been able to discern, is in the KIND of aid, its financing, and political stance toward countries brought into the BRI orbit. China focuses on infrastructure projects that raise a nation's capital assets and infrastructure -- a foundation of independent development; it uses its own excess labor supply to build the ports, airports, bridges, rail and roads underdeveloped countries direly need to sell and deliver what they can  produce. In exchange they get to extract resources from, and (lately) also sell into the local markets. The developing nations end up in debt, but with something to show for it. Further, the Chinese BRI approach differs strikingly from US neo-colonialism in its political stance: by contrast, it advocates, and appears to practice, non-interference in the politics of the developing nation.

I say give it a chance to work. It is not OUR enemy. You want to compete with it -- come up with a better development plan. But who is going to welcome a friend who calls them "a shithole"?

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How BRI poses risks to 21st-century geopolitical landscape   

How BRI poses risks to 21st-century geopolitical landscape
http://www.atimes.com/how-bri-poses-risks-to-21st-century-geopolitical-landscape/

On the same day Donald Trump and Xi Jinping struck a trade-war truce in Argentina, some 11,000 kilometers away Canadian authorities made an arrest on suspicion of violating US sanctions on Iran. Conversely, a Chinese court order instructed Apple to stop sales of its iPhones, which observers believe was a cautionary signal to Washington.

All these escalations threaten to make the US-China conflict much worse. This latest development highlights the fact that fundamental disagreements between the US and China are intensifying fast and furious. Indeed, Beijing and Washington face geopolitical fissures that may persist in the coming decades.Such disagreements have become increasingly evident since 2013 when Xi launched his trillion-dollar Belt and Road Initiative to dominate Eurasia and thereby the world beyond. Donald Trump's White House, in turn, is wielding tariffs along with its Indo-Pacific Strategy as weapons to try to beat recalcitrant allies back into line and cripple the mammoth BRI.

However different these approaches may seem, they share one strikingly similar feature: a reliance on the concept of "geopolitics" to guide their bids for global power.

At the end of the 19th century, an American naval historian argued that sea power was the key to national security and international influence. A decade later, a British geographer observed that railroads had shifted the locus of global power landward into the interior of the vast Eurasian continent.

In the succeeding century, a succession of scholars would draw on these two basic ideas to inspire bold geopolitical gambits by Nazi Germany, by Cold War Washington, and more successfully by China's mega-project Belt and Road Initiative, which primarily focuses on all forms of physical infrastructure (road, airport, maritime and energy).

China envisages a vast global network of trade, investment and infrastructure that will reshape financial and geopolitical ties – and bring the rest of the world closer to Beijing. Since its inception, the BRI has financed infrastructure projects in 112 countries. It is a modern-day version of the Marshall Plan, America's reconstruction effort after World War II, which created a foundation for enduring military and diplomatic alliances. China's strategy is bolder, more expensive and far riskier.

In the West, it is feared that the BRI is an extension of efforts by the Communist Party of China (CPC) to undermine the security and economic architecture of the international order. China's growing largesse, Western countries worry, comes largely at the expense of international institutions and American influence.

As the BRI is only five years old (and many of its main members have been involved for a far shorter time), its full results cannot yet be judged. However, a preliminary assessment can be offered for BRI projects in South and Southeast Asia, the region described by Chinese leaders as the "main axis" of the project. Large ports in Pakistan, Sri Lanka and Myanmar – three countries along a major oil and commerce route from the Middle East and Africa – could someday double as naval logistics hubs. These three BRI countries play key roles in achieving China's core geopolitical strategic goal called the "String of Pearls."

That term as a geopolitical concept was first used in an internal US Department of Defense report titled "Energy Futures in Asia." The term is also widely used in India's geopolitical and foreign-policy narratives to highlight its concerns over massive BRI projects across southern Asia.

Through this geopolitical strategy, Beijing aims to build a network for Chinese military and commercial facilities and relationships along with its sea lines of communication, which extend from the Chinese mainland to Port Sudan. The sea lines run through several major maritime chokepoints such as the Bab-el-Mandeb strait, the Strait of Malacca, the Strait of Hormuz, and the Lombok Strait as well as other strategic maritime centers in Pakistan, Sri Lanka, Bangladesh, Maldives and Somalia.

All these straits, countries and chokepoints are crucial for international energy and trade supply lanes, which makes them of interest to the US Navy. Consequently, the Chinese military presence in these regions will undoubtedly escalate tensions that could turn into an unexpected incident, as has already occurred in the South China Sea.

A 2016 report by the Center for Strategic and International Studies judged that none of the Indian Ocean port projects funded through the BRI have much hope of financial success. They were likely prioritized for their geopolitical utility. Projects less clearly connected to China's security needs have more difficulty getting off the ground: the research firm RWR Advisory Group notes that 270 BRI infrastructure projects in the region (or 32% of the total value of the whole initiative) have been put on hold because of problems with practicality or financial viability. There is a vast gap between what the Chinese have declared they will spend and what they have actually spent.

In addition, prolonged exposure to the BRI process has driven opposition to Chinese investment and geopolitical influence across the region. In Maldives, the pro-Beijing Progressive Party of Maldives was unseated last year by the Maldivian Democratic Party, which ran on an explicitly anti-BRI platform. Maldives' new president, Ibrahim Mohamed Solih, calls the BRI "a big cheat" and a "debt trap" that must be abandoned or renegotiated.

Beijing is heavily focused on its neighbors, lending them money for extensive road-building projects. Pakistan is running out of money to repay the loans, part of a broader pattern of what critics call China's "debt trap" diplomacy. The New York Times examined nearly 600 projects that China helped finance in the past decade, through billions of dollars in grants, loans and investments. Taken together, they show the scope and motivation of China's strategy.

The China-Pakistan Economic Corridor (CPEC) is a classic example of China's aggressive geopolitical outreach through its Belt and Road Initiative, aptly analyzed by the conservative National Review:

"The heart of the BRI is debt-trap diplomacy: China oversells the benefits of these infrastructure projects, offers credit for them on onerous terms, and when the bill comes due and its debtors aren't able to pay, demands control over the infrastructure and influence in the region to compensate. The attempt to turn these countries into satellite states via the strategic construction of infrastructure is pure geopolitics. China has eyed a westward turn for years, and its desire to advance in Southeast Asia is no secret."

Elsewhere in the Pacific the democratic Quad – Australia, India, Japan, and the US – and several European countries have begun to signal major reservations about the BRI.

Jeff Smith, a research fellow at the Heritage Foundation, says in an article, "Chinese investments in sensitive infrastructure and the outgrowth of Chinese 'sharp power' and the ways it is using its economic influence as an extension of its foreign policy to punish, coerce, or incentivize regional states to align with its agenda."

Now, America and its partners have begun exploring how best to cope with the consequences of the BRI, offer alternatives to developing countries, and defend the rules-based order against new challenges from China and the BRI. Consequently, as the existing geopolitical landscape becomes bumpier and in the coming days, we may see a riskier contest between East and West.

As the head of America's Indo-Pacific Command, Admiral Philip Davidson, put it in testimony to a US Senate committee, the BRI now represents Beijing's bid to "shape a world aligned with its own authoritarian model while undermining international norms such as the free flow of commerce and ideas."

Yet it is also undeniable that China is accumulating substantial – at times decisive – financial and political leverage across the geopolitical map, acquiring new stakes in key ports, new political allies, new resupply points for the Chinese navy, and new destinations to export elements of its authoritarian model and censorship regime. Even if the BRI fails to meet its lofty ambitions or ends up generating as much resentment as fealty, it is extending China's reach and altering the geopolitical balance of the Indo-Pacific region in the process.

Therefore, the BRI has drawn extensive attention from academics and policymakers. The range of opinion varies from economic cooperation and win-win initiative to Chinese grand strategy, which allows China to use its sharp power across the region. Initially through trade, finance, and infrastructural tools that open an avenue to use for multiple purposes such as security in the long run to counter the US dominance in the Euro Asian region.

However, Washington's new aggressive stance poses a challenge to Xi, a princeling who has promoted a more assertive foreign policy, in sharp contrast with Deng Xiaoping's cautious approach of "hide your strength, bide your time, never take the lead."
 

-- via my feedly newsfeed

Jared Bernstein: There’s heightened nervousness about the next recession and there are signs pointing in both directions. [feedly]

A deeper dive into a 2019 recession likelihood.....

There's heightened nervousness about the next recession and there are signs pointing in both directions.
http://jaredbernsteinblog.com/is-heightened-nervousness-about-recessions-a-recessionary-indicator-there-are-signs-pointing-in-both-directions/

I can't turn around without seeing or hearing people worrying more about the next recession.

Google Trends: Web search for "next recession"

Source: Google Trends

My peeps at the Indicator have a nice podcast on the topic. The WSJ points out that more than half of economists they surveyed expect a downturn by 2020, which, in case you live under a rock, the article helpfully notes is an election year.

The reasons for the heightened anxiety are:
–Slower global growth, particularly in China (also Europe and Japan). Remember how Apple's market cap fell 10 percent in one day a couple of weeks ago. That was on the news that their China sales were down. We're all connected, man…also, trade war.

–Higher interest rates and the flat yield curve. Interest rates are up, which acts like a brake on growth and they're up more for short- than long-term rates, meaning the yield curve is flat, though not inverted (inversions provide reliable recession warnings, though they don't say precisely when).

–High levels of US sovereign and corporate debt could provoke a credit crisis. High private sector debt levels can proceed a deep and sudden credit contraction, and high government debt can lead to the perception of diminished fiscal space, discussed below.

–Overheating risk and the Fed. This has maybe faded in recent weeks as the Fed has sounded pretty dovish of late, while inflation–actual and expected–looks decidedly nonthreatening. But with historically low unemployment and bigger-than-expected job gains, there's always some nervousness of the return of that 70s show, with inflation taking off and the Fed having to slam on the brakes.

–Trumpian cray-cray. I mentioned the trade war. Then there's the shutdown. And…how can I say this?…our current leadership fails to inspire confidence in this (or any other) space.

These are all real things, but here's a realer thing: economists can't tell you with any authority when the next recession is coming. If you forced me to take a stand, I'd stand with Powell. Heather Long reports the following:

"I don't see a recession" in 2019, Powell said Thursday in an interview at the Economic Club of Washington, D.C. "The U.S. economy is solid. It has good momentum coming into this year."

To be clear, the "solid U.S. economy" still leaves too many people and places behind, and real middle-wages, incomes and earnings haven't been nearly as strong as, say, corporate profitability.

Just to be a contrarian, let me tell you about a few indicators that underscore Powell's near-term optimism.

First, economist Jan Hatzius from Goldman Sachs has long emphasized the private sector balance sheet (those of us of a certain age recall that the great Keynesian economist Wynne Godley emphasized this metric).  Jan writes that: "…a financial deficit in the private sector—i.e., an excess of private sector spending over private sector income—…makes aggregate demand highly vulnerable to disruptions in asset prices or the supply of credit."

Well, private balance sheets look pretty good–they're around their historical average. Hatzius calls this "an unusually benign reading this deep into an expansion" and adds that "it is not only the household sector that runs a surplus but also the nonfinancial corporate sector, which is reassuring given the concerns around leveraged loans and corporate credit more broadly."

I agree. However, the figure does show that this balance can spike pretty quickly, so here's some positive indicators to which I'd give more weight: the strong labor market, rising real wages, and their correlation with real consumer spending. The figure below plots the yearly change in real aggregate earnings–real wage*jobs*hrs/wk–for middle-wage workers against consumer spending, which, ftr, is just under 70 percent of US GDP. To be fair, this is a much less forward looking indicator than say, the yield curve, but here's the punchline: unless you have a story about the US job market heading south in a big way this year, I don't think you have much of a near-term recession story.

Sources: BEA, BLS

Moreover, my labor market story goes the other way. I suspect unemployment–a lagging indicator–falls further this year and that the combination of strong labor markets and low energy prices leads to decent real wage gains. In fact, just this AM, we learned the real, mid-level hourly wages rose 1.3 percent in 2018, its strongest showing since August 2016.

To be clear, in much of my analysis, I have emphasized the expected slowing of growth later this year as fiscal stimulus fades. But, again, it's not obvious that this doesn't mean a return to the pre-stimulus trend growth rate of around 2 percent as opposed to a recession.

Finally, while we just can't know when and why the next downturn will hit, we can get a sense of whether we're ready for it (listen to the Indicator link above on this question). I say we're not (though if we did the stuff in here, we could be). Monetary space may be constrained by an historically low federal funds rate, and if the debt/GDP level is =>80 percent, which may well be the case, history shows that the fiscal authorities, politically constrained by this higher-than-average debt level, tend to do less by way of discretionary, counter-cyclical offsets.

Such austerity would be a terrible mistake, for a lot of reasons. Depending on the depth of the downturn, it's a great way to consign millions of people and families to unnecessary job and income losses. And such losses, depending on how deep they are, have been shown to leave lasting scars on people well into their post-recession lives. Also, as I wrote yesterday, Blanchard's new work shows the fiscal and welfare costs of public debt to be far below where the convention debate places them (and in my framework, countercyclical offsets in recession are definitely GD–read the piece).

I'll continue to heed all the warnings of my fellow tradesmen and women–no question, there are headwinds now that were not upon the land a year ago. But I'll be more guided by the fact that nobody can time a recession, while anyone who's paying attention can raise trenchant warnings about whether we're ready for it, wherever it is.

 -- via my feedly newsfeed

The Greatest Anticompetitive Threat of Our Time: Fixing the Horizontal Shareholding Problem

An interesting anti-monopoly reform...not sure it works in IT however.

The Greatest Anticompetitive Threat of Our Time: Fixing the Horizontal Shareholding Problem

Undisputed empirical studies confirm that horizontal shareholding poses a great anticompetitive threat. What can antitrust enforcers do about it? Quite a lot, in fact.

 

 

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Editors' note: In the last few weeks, the Federal Trade Commission has been holding a series of public hearings to discuss whether competition enforcement policies should be updated to better reflect changes in the US economy, namely market concentration and the proliferation of new technologies. The FTC hearings, which will be held throughout the fall and winter, cover topics as varied as privacy and big data, the consumer welfare standard in antitrust and labor market monopsonies. In order to provide ProMarket readers with a better understanding of the debates, we have asked a number of selected participants to share their thoughts on the topics at hand.

 

You can read all previous installments here. 

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Horizontal shareholding poses the greatest anticompetitive threat of our time, mainly because it is the one anticompetitive problem we are doing nothing about. As I show in my new article, "How Horizontal Shareholding Harms Our Economy—And Why Antitrust Law Can Fix It," this enforcement passivity is unwarranted. 

 

Horizontal shareholding exists when the leading shareholders of horizontal competitors overlap. (Although often called "common shareholding", that terminology is imprecise because common shareholding often exists between noncompeting companies.) Such overlaps used to be relatively rare, but has become common because of the growth of institutional investors and index funds. Moreover, their influence is even higher than their shareholdings because they are far more likely to vote than individual investors. Today, institutional investors own 70 percent of shares and cast 88 percent of votes in publicly-traded firms, and those figures rise to 80 percent of shares and 93 percent of votes at S&P 500 firms. The big three index fund families (BlackRock, Vanguard, and State Street) alone own 18 percent of shares and cast an estimated 24 percent of votes in publicly-traded firms, and own 20 percent of shares and cast an estimated 26 percent of votes at S&P 500 firms.

 

The result is that today the leading shareholders of large competing firms often comprise the same set of institutional investors. Common sense and economic theory indicates that firms with the same leading shareholders are less likely to compete vigorously against each other.

 

As I detail in my article, a series of empirical studies have confirmed that horizontal shareholding has anticompetitive effects in concentrated markets. Although one of those studies has been disputed, the others largely have not.

 

One of the undisputed studies is a cross-industry regression analysis by Gutiérrez and Philippon which found that the gap (now historically high) between corporate profits and investment is mainly driven by the level of horizontal shareholder ownership in concentrated markets. Further, this new study found that, within any industry, the investment-profit gap is mainly driven by those firms with high horizontal shareholding levels.

 

Gutiérrez and Philippon's undisputed study establishes a link between anticompetitive horizontal shareholding and the economy-wide lack of corporate investment that has contributed to low economic growth in recent decades. Indeed, it suggests that horizontal shareholding is a more important cause than other causes (like general macroeconomic, technological, or policy trends) that would operate similarly across industries and certainly across all firms within any industry. 

 

Another recent cross-industry empirical study by Anton, Ederer, Gine and Schmalz shows that horizontal shareholding makes changes in executive wealth less sensitive to firm performance. This study is undisputed as well. To be sure, critics like to focus on an old dispute that existed about the empirical effect of horizontal shareholding on executive annual pay, but such annual pay captured only 22 percent of executive wealth changes. The natural effect of making changes in executive wealth less sensitive to firm performance is obviously to blunt executive incentives to compete.

 

Recent industry studies have likewise confirmed anticompetitive effects from horizontal shareholding. Two empirical studies by Jin Xie and Joseph Gerakosz and by Newham et. al show that horizontal shareholding delays and prevents entry into pharmaceutical markets. These studies are undisputed too.

 

Another empirical study by Azar, Raina, and Schmalz shows that horizontal shareholding harms bank fees and rates. Although critics argue that this study has been disputed by another study that found more mixed results, there is not much of a real dispute yet—the "contrary" study stresses that its results are preliminary because it relies on a data source with known irregularities that they have not yet investigated and corrected. Moreover, this contrary study tries to measure the effects of horizontal shareholding while excluding any information about bank market shares and concentration, which naturally makes the results more mixed. After all, economic theory indicates that even absolute horizontal mergers between some firms in an unconcentrated market are unlikely to affect prices.

 

If a study of all horizontal mergers (whether or not in concentrated markets) found mixed effects on prices, no one would conclude that it proves that horizontal mergers in concentrated markets have no anticompetitive effect. Likewise, no one should conclude that a study of all horizontal shareholding (whether or not in concentrated markets) that finds mixed effects on prices proves that horizontal shareholdings in concentrated markets have no anticompetitive effect.

 

The empirical dispute has focused on a study by Azar, Schmalz and Tecu showing that horizontal shareholding harms airline prices. But this finding has been replicated by critics even using their own re-construction of the data and measures of horizontal shareholding. Critics have negated airline price effects only by incorrectly altering the regression, such as by using an instrumental variable that is actually negatively correlated with horizontal shareholding or by incorrectly setting many shareholding rights equal to zero. Accounting for other critiques, like claims of endogeneity, imprecise market definition, or the effects of changing fuel costs, turn out to actually increase the estimated price effects.

 

The empirical literature is thus not too uncertain to take action against horizontal shareholding. In any event, empirical uncertainty could not support current enforcement practices, which rely on metrics like HHIs that affirmatively assume that horizontal shareholding has zero effect—an assumption that clearly lacks any theoretical or empirical basis.

 

Critics argue that we need clearer proof of the precise causal mechanisms. But the causal mechanisms are the same as the ones that law and economics scholars have always cited to explain how agency slack is limited: board elections, executive compensation, control contests, the stock market, and the labor market. As I detail in my article, each of those mechanisms is supported by copious evidence.

 

Critics also argue that three contra-mechanisms will prevent horizontal shareholding from having anticompetitive effects. But those contra-mechanisms are all unpersuasive. First, critics argue that anticompetitive effects will be prevented by accountability to non-horizontal shareholders. But when horizontal shareholding has anticompetitive effects, it affirmatively benefits non-horizontal shareholders because it increases profits at their firm by simultaneously lessening competition at both their firm and rival firms. Thus, non-horizontal shareholders have no more incentive to object to anticompetitive horizontal shareholding than they would to the corporation entering into a legally-permitted cartel. 

 

Second, critics argue that index funds who are horizontal shareholders in the airline industry also own stock in firms that buy from or sell to that industry (such as airplane makers and business travelers), which, they argue, should negate any anticompetitive incentives. But even the large index funds stressed by this argument externalize the lion's share of anticompetitive effects onto buyers outside the index. Indeed, in the airline example favored by critics, the S&P 500 externalizes 95 percent of the anticompetitive effect outside of firms in the index. 

 

Third, critics argue that index fund families lack incentives to exert the effort needed to influence corporate behavior in anticompetitive ways to increase portfolio value. But those critics are mistaken, because the anticompetitive gains are vast and the incremental effort costs are generally zero or negative, given that the index fund families have to decide what position to take on votes or management interactions either way and taking a position that does not pressure managers to compete more vigorously is likely to please them.

 

Index fund families also have strong incentives to compete with active funds for investment flow, and index fund families have many active funds of their own. The critics also ignore the fact that what matters is relative effort, and however much index fund incentives to exert effort may fall short of the optimal, the incentives of other shareholders with smaller shareholdings are even less. In any event, any theoretical claim that index fund families lack sufficient incentives to influence corporations is clearly disproven by empirical study after empirical study showing that, in fact, index fund families are hugely influential in influencing corporate behavior.

 

Moreover, index fund families are not the only or main horizontal shareholders. Claims that horizontal shareholders lack incentives to influence corporate behavior conflict not only with the above-noted empirical studies showing anticompetitive effects, but with dozens of other empirical studies showing that common shareholders influence corporate behavior on many other dimensions. At some point, theoretical claims that it is implausible that common shareholding could affect corporate behavior must give way to the dozens of empirical studies showing that it does just that.

 

What can antitrust law do about horizontal shareholding? Quite a lot, in fact. The Clayton Act bans any stock acquisition that may substantially lessen competition, and Supreme Court case law makes clear that continuing to hold stock is an "acquisition." Even critics acknowledge that the plain meaning of the Clayton Act would ban horizontal shareholding—if they were convinced that it empirically had anticompetitive effects. Indeed, the Clayton Act has one provision for cross-shareholding between commercial entities and another, separate provision that expressly extends the Act to stock acquisitions by any entity in commercial entities: i.e., to horizontal shareholding.

 

To be sure, the Clayton Act has a solely-for-investment exemption, but it exempts a stock acquisition from liability only if it both (1) confers no influence over the corporation and (2) fails to actually create anticompetitive effects. The exemption thus does not apply if anticompetitive effects are actually proven. Contrary claims that the Clayton Act applies only if a stock acquisition confers control or influence conflict not only with the statutory text, but also with six federal court opinions and the agency guidelines on cross-shareholding.

 

In any event, horizontal shareholding necessarily involves contractual agreements, so when those agreements have anticompetitive effects, they necessarily constitute agreements in restraint of trade. Thus, the Sherman Act bans any horizontal shareholding that has anticompetitive effects. Indeed, the historic trusts attacked by the Sherman Anti-Trust Act were horizontal shareholders.

 

EU merger law cannot remedy all anticompetitive horizontal stock acquisitions, but it could remedy the subset of those acquisitions that potentially give horizontal shareholders decisive joint influence over corporate activities. In any event, EU Article 101 on agreements and concerted practices is at least as broad as the Sherman Act and can thus condemn any horizontal shareholdings that have anticompetitive effects. EU Article 102 also bans anticompetitive horizontal shareholdings because such shareholdings create a collective dominant position and abuse that position with excessive pricing.

 

Anticompetitive horizontal shareholding is thus also illegal in all the other nations (including China) that ban anticompetitive concerted practices and/or abusing a collective dominant position via excessive pricing.

 

Even if we fail to directly tackle horizontal shareholding, its effects have important implications for traditional merger analysis. In particular, it lowers the concentration levels that traditional merger analysis can tolerate. Continuing to allow unimpeded horizontal shareholding would thus provide strong support for those who currently argue that antitrust law should be far more aggressive about preventing market concentration.

 

Horizontal shareholding can also mean that what now look like non-horizontal mergers should be treated as horizontal. Horizontal shareholding thus turns out to also support current antitrust movements that decry our increasing levels of national industrial concentration, even if those concentration figures do not correspond to relevant antitrust markets.

--

John Case
Harpers Ferry, WV

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