Wednesday, March 28, 2012

What Argentina Means for Us: 10 Years After the Fact 

Austerity Failed to Stabilize Economy & Debt 10 Years Ago
One decade ago, the country which had once been the most wealthy country in South America, with high economic growth rate, universal health care and a historic living standard equal to that of Canada, suffered economic crisis, defaulted on its debt, and collapsed. Although Argentina has since seen some recovery, living standards never recovered to historical levels. Between 1998-2002, GDP shrank by 20%.

How Austerity and Neoliberal Reforms Ruined a Nation
In 1989, Menem began neoliberal reforms amid massive inflation. The reforms reduced public-sector employment while eliminating employment protection and insulation for local businesses. A spike in unemployment followed of course. By 1995, unemployment was at 19% and there were strikes all over Argentina. In 1991, the Convertibility Law pegging Argentina's peso to the Dollar was enacted. While this did reduce inflation dramatically, it also eliminated Argentina's monetary tools, which should have been used to combat crises. Moreover, both public and private sectors accumulated large US-dollar-denominated debt and liabilities. Argentina's debt also mushroomed as a result of the enormous costs associated with privatizing its social security system. 

By Mid-1999, the Argentina was full recession. This was largely due to Argentina's unprotected exposure to the Brazilian and Mexican markets, a construct of Menem's 1989 reforms. In September of that year, Argentina passed the Fiscal responsibility Law, under which it committed to large spending cuts at both the local and federal level in response to the recession. 

In 2000, the De La Rua administration tried to solve the country's austerity and neoliberalism-based economic problems with more austerity and neoliberal reforms. $1 Billion in budget cuts followed, as did labor market reforms. That same year, the IMF came to Buenos Aires offering Argentina a three-year $7.2 Billion package under conditions of strict austerity and assumptions of 3.5% economic growth. In fact Argentina grew only 0.5%. Because austerity had failed to solve the recession, reduce debts, or produce economic growth, 2001 began with Argentina  announcing voluntary debt restructuring, and a fourth round of austerity. Three months later, a nationwide strike against the austerity plans. By year's end, there had been a run on the banks, rioting, looting, and the resignation of three presidents. In December, Argentina could not guarantee foreign debt.  

What Does it Mean Today?

In Argentina a decade ago, as in Greece, Spain and Italy today, the relinquishing of monetary authority initially served to improve investor confidence and reduced inflation worries. In both cases, the side-effect was the loss of monetary tools needed to fight an economic downturn. This put more strain on fiscal policy makers to deal with recession on their own. Under the strain of recession, fiscal policy also lost its ability to confront economic circumstances.

Two Key Lessons of Argentina:

1: Monetary autonomy is indispensible if an economy is to stay afloat in the long-run. The meaning of this for Europe is that monetary policy has to be formulated in the benefit of the countries who actually use the Euro, not just some of the Eurozone's member states. Otherwise, growth will be almost non-existent and crisis response will be nearly impossible.

2: Austerity does not get you out of a recession. Neither do neoliberal reforms. This is especially true when the recession is actually caused by austerity and neoliberal reforms in the first place. 
Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

Sunday, March 18, 2012

Obama and Steve Jobs debate US Tech Jobs

(NY Times Article)

A January 12th New York Times article, the key I.T. jobs behind the creation of Apple's line of smart phones  has turned into an indictment of how far things have come, and of what globalization has become.

"Almost all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold last year were manufactured overseas.Why can’t that work come home?" Mr. Obama asked. Mr. Jobs’s reply was unambiguous. “Those jobs aren’t coming back,” he said. Ostensibly, the reason is flexibility. To put an anecdote to the claim, one day in 2007, just before the iPhones were to hit the shelves for the first time, Jobs decided to replace the plastic screens with glass ones. In China, "A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day."

Apple has 43,000 domestic employees. Meanwhile, the iPhone is assembled in China's infamous Foxconn City, in a facility that has 230,000 employees, many working six days a week, often up to 12 hours a day. Over a quarter of Foxconn’s work force lives in company barracks and many workers earn less than $17 a day. Foxconn has also recently become infamous for a string of employee suicides.

There you have it. The meaning of "competitiveness", and "flexibility", come down to thousands of employees working 12 hour shifts for less than $17 per day and living in factory dorms on site where suicides are commonplace. A scathing indictment of how far things have come. A scathing indictment of what "flexibility", "competitiveness", and "job losses to China" really mean. We should not be so surprised. Corporations are legally obligated to maximize shareholder value. They will have no problem doing layoffs, or creating huge negative externalities.

What Needs to be Done?
Since its pretty clear that Americans aren't about to start living in dorms underneath the factory and working 12 hour shifts while on suicide laborers do in China. So, its pretty clear that something needs to be done so that Steve Jobs' attitude about American tech employment is buried along with him. 

As unambiguously as possible, tech jobs need to be brought to US shores, be it through direct subsidy, or requirement that Apple and other potentially strategic firms locate a minimum percentage of their tech jobs domestically (including work generated via subcontractors). Some Asian countries (including China) as use domestic input requirements to keep production chains in-country.
Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

Wednesday, March 14, 2012

Smith Leaves "Toxic" Goldman Sachs

Greg Smith, Goldman Sachs' London-based equity derivatives boss for Europe, the Middle East, and Africa resigned today, citing severe and unsustainable moral decline at the bank. His resignation letter, published today in the New York Times accuses Goldman of severe ethical problems in its corporate culture. Reflecting on the "decline in the firm’s moral fiber", Smith asserted that in the past, "leadership used to be about ideas, setting an example and doing the right thing," while today he is outraged concerning "how callously people talk about ripping their clients off". 

Ethical Concerns
While Goldman's reckless behavior in the Housing bubble in the US and its involvement in the Greek Sovereign Debt crisis (by helping Greece hide part of its sovereign debts, then betting against Greece) are well-known and well-documented, Smith cites a general culture of unethical business, which involves pitching lucrative and complicated products to clients, which are not the most aligned with the client’s goals.

Furthermore, the BBC reminds us that in 2010, Goldman Sachs was fined $550m for civil fraud charges of misleading investors  - the biggest fine for a bank in the SEC's history. Less well known perhaps, is the alleged role of the Goldman Sachs Commodity Index in the 2007 world food price crisis.

What Needs to be Done?
Goldman Sachs is the Standard Oil of our day. Then, as now, something has to be done. While Goldman is clearly an investment bank that is too big to fail, the concern is, that it might also be too big to bail. On top of that, Goldman is also the bank which is at the center of the world's financial system. This is why it way bailed out by US taxpayers.

Since dismantling the beast might create some quite severe global economic fallout, a better option would be to keep  it on a tight leash. Not only do rules such as Basel III and Dodd-Frank need to be put in place and strictly enforced, but acquiring a stake in the bank large enough to sit on the board and improve Goldman's corporate governance from the inside might also be a good idea. After all, the taxpayer has already paid a sizable chunk of money into Goldman's and deserves to be compensated for his investment. A seat on the board would go a long way towards properly compensating that.
Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

Saturday, March 10, 2012

ALMP: The Path to Less Unemployment

- This piece is dedicated to my American readership. Presented here are the sorts of thing I came to Europe to learn about -

Because unemployment levels have been in the news on both sides of the Atlantic since the crisis began, a lot has been said on what to do about it. This is the case on both ends of the political spectrum. Unfortunately, unemployment is used as a justification by right-wing politicians in all countries to do some pretty nasty policies which have the final effect of redistributing wealth upwards to the richest few percent of the population. Basically, those of us who live in the 99% should be worried that we are constantly about to be made worse-off by spending-cuts, tax-cuts, wage cuts to "restore competitivity" and legalized union busting.

What we need are policies designed to actually make the labor force more competitive and productive, keeping people on the job as much as possible. The importance of keeping people in the job cannot be stressed enough. As if the link to consumer spending were not a convincing reason to try to maintain high employment figures (there are plenty who actually think consumer spending of of secondary importance in an economy), there is also the question of  productivity. While, productivity is influenced by how long you have been doing the job, periods of unemployment not only keep productivity from improving, but actually decrease it as well. Put formally:

Marginal Productivity of Labor = F(years of education) + F(years of experience)

In other words, if we aren't targeting one of these two areas, we probably aren't improving productivity.

What are ALMPs?
Active Labor Market Policies are pro-active, pro-worker policies designed to reduce unemployment by improving the productivity of the labor force through either education or job experience.

Examples of ALMPs packages generally include:
  • Job search Assistance: This reduces frictional unemployment.
  • Life-Long Learning: Specialized labor market training can take both low-skilled forms such as basic computer-literacy courses, as well as high-skilled forms such as foreign language training and sector-specific skill-certification.
  • Wage Subsidies to the Private Sector: Under this sort of scheme, part of the employee's wage is paid by the state, making him less expensive to the employer. Such a policy should be used on a temporary and graduated basis in order to discourage employer dependency on such policies. 
  • Direct Job Creation in the Public Sector: One of the primary uses of State-Owned Enterprises is to do counter-cyclical policy. For those who think that public-sector job-creation leads to inefficiency, just remember that when we are comparing this policy to persistent unemployment and idle, un-utilized resources, almost any level of output is more productive, especially in the long-term.
According to the OECD, even the most expensive and most extensive ALMP programs cost less than 1.8% of GDP. In exchange for this miniscule expenditure, the employment effect in the countries on the far left of the graph simply cannot be overlstated.

The RWI / IZA Study
This study, undertaken by the German Institute for the Study of Labor (IZA) is a meta-study, which was meant to study what worked and what didn't across the EU-15 in the early 2000's.
Measures of Active Labor Market Policy are widely used in European countries, but despite many econometric evaluation studies no conclusive cross-country evidence exists regarding "what program works for what target group under what (economic and institutional) circumstances?". This paper results from an extensive research project for the European Commission aimed at answering that question using a meta-analytical framework. The empirical results are surprisingly clear-cut: Rather than contextual factors such as labor market institutions or the business cycle, it is almost exclusively the program type that matters for program effectiveness. While direct employment programs in the public sector appear detrimental, wage subsidies and "Services and Sanctions" can be effective in increasing participants' employment probability.
Jochen Kluve is Professor of Empirical Labor Economics at the School of Business and Economics, Humboldt-Universität zu Berlin, and Head of the Berlin Office of RWI.