Filling the breach: Exploring China’s role in post-TPP Asia

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This month, U.S. Secretary of State Rex Tillerson met with top Chinese officials to pave the way for talks between the two countries’ leaders. Chinese economic policies in the Pacific will surely be discussed, especially as China exploits the demise of the Trans-Pacific Partnership (TPP) to assert itself as a powerful influence on trade policy in Asia. As the talks near, China’s new trade agreements with other Asian countries will offer valuable insight into how China has sought to expand its economic influence and upset Asia’s political landscape in the process. Amid rising tensions in Asia, the leaders of the United States and China must both recognize the futility of their attempts to use trade agreements as tools to dominate political developments in the Pacific region. Furthermore, while these two superpowers compete unsuccessfully for regional power, it will be the economic prosperity of other Pacific nations that suffers.

Discussions of Asia without the TPP may come as a surprise to some, especially considering the Obama administration’s strong support for the agreement. However, carried into office by the surging tide of populism, President Donald Trump has quickly acted to reverse any pro-globalization policies promoted by the previous administration. Without ratification from the United States, the TPP cannot go into effect, removing any possibility of the trade deal further integrating the economies of Asia and the United States. When President Trump put an end to the agreement, critics speculated that in response to U.S. actions, China would step in as the new economic leader in the Pacific region through trade deals excluding the United States. At the time of Trump’s withdrawal from the TPP, China had not yet enacted any such agreements, leaving its future role in the region unclear.

However, it did not take long for China to adjust to the United States’ withdrawal from the TPP and champion new international trade policy in the Pacific. After the TPP’s demise, many countries in Asia turned to the Regional Comprehensive Economic Partnership (RCEP) as the primary trade agreement, intended to promote freer trade between the many Pacific nations involved. Glaring differences between the RCEP and the TPP include the RCEP’s inclusion of China, as well as the absence of the United States despite its position as a major trading partner with many of the nations involved in the RCEP. Although negotiations among the 16 participating countries are ongoing, the RCEP agreement primarily focuses on lower tariffs, without any rules on environmental and labor protections. The trade deal will further integrate the economies of the participating countries, allowing for supply chains unhindered by expensive tariffs.

Cast in the role of outside observer to the RCEP because of its own political motivations, the United States loses out on a powerful tool for exerting its economic power to influence political and social issues in Asia. Under President Obama, the United States offered the economic benefits of lower tariffs to encourage developing nations in Asia to adopt stronger environmental and labor standards. Under the RCEP, it is unlikely that such protections would be enacted on the scale that the TPP proposed. After all, for many manufacturing-based economies in Asia, the lack of these safeguards allows their firms to produce at lower prices than many competitors can. Through the RCEP, China seeks to provide the Pacific region with the benefits of lower tariffs, without taking away the low-cost manufacturing advantage of these nations. In doing so, it hopes to assert itself as a powerful influence in the region and improve ties with other Asian countries, even as it pursues aggressive, expansionist policies in the South China Sea.

If China wishes to continue as the dominant economic force in Asia, however, it must also accept the detrimental economic effects of its politically motivated exclusion of the United States from the RCEP. Exports to the United States make up 18 percent of China’s total exports. As such, China would gain a great deal from free trade with the United States, though China would have to weigh this against regional influence lost to the United States. Furthermore, if China continues to exclude the United States from its trade agreements in the Pacific, increased tensions between the two countries could drive Trump to pursue protectionist policies. This would prove highly detrimental to the Chinese economy, threatening its ability to sell products abroad at lower prices than U.S. competitors can.

Most significantly, though, the politicized absence of the United States from Pacific trade agreements endangers the economic well-being of other Asian countries. Manufacturing-dependent economies like Malaysia and Vietnam looked to the TPP to provide access to U.S. markets like textiles, where these countries could sell their products at low prices. However, Chinese markets already have access to cheap manufactured goods produced domestically. Thus, trade deals with China would be unlikely to benefit other Asian economies to the degree that free access to U.S. markets would. Because of this, China would be less able to exert its economic leverage in pursuit of political influence in Asia, and developing economies in the region would suffer.

As talks between the leaders of the United States and China draw near, both countries must recognize the unintended consequences of trade policy as a tool for political influence. The allure of unfettered access to American markets will continue to divide the loyalties of Asian nations, even as China entices them with promises of freer trade within the region. As issues with the TPP and RCEP demonstrate, neither nation will secure uncontested political influence in the Pacific region through heavily politicized trade agreements. Instead, both the United States and China should focus on creating trade agreements to optimize economic growth in the numerous developing nations of the Pacific region through freer trade. If the United States and China cooperate on trade policy to achieve this goal, both they and many others in the Pacific region will benefit. Neither country should allow political machinations to stand in the way of economic progress.

Solving U.S. health care woes: a nonpartisan approach

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Earlier this month, Sens. Bernie Sanders and Ted Cruz engaged in a televised debate over the state of health care in the United States. While both politicians agreed with the assessment that health care as it stands now requires great reform, their solutions, not unexpectedly, fell along party lines. Americans were offered two, predictably partisan, options: Sanders called for more government involvement, while Cruz suggested cutting regulations as the key to reducing the burden of the costly system now in place. Implementing lasting reform in our broken health care system, however, will require a different approach—one guided by proper incentives and economic evidence rather than restrained by ideology.  

Both sides of the debate took an important first step when Sanders and Cruz rightly noted the shortcomings of the current system. Health care costs make up 17.1% of U.S. GDP, the highest in the world by a significant margin. Health outcomes, unfortunately, do not reflect this reality. Average life expectancy in the U.S. is only 78.7 years, ranking 26th relative to other countries in the world. Effectively, the United States is paying more for health care that does not deliver any significant improvement in health indicators. Americans are rightfully unhappy about this situation, but significant strides can be made to solve this problem in a manner that is largely nonpolitical.

In fact, many of the problems Sanders and Cruz recognized with the current system have solutions that do not fall squarely into any political ideology. Proposals like mandatory health savings accounts (HSAs) provide one instance of such policy fixes.

By ensuring citizens save money specifically for health care expenses, HSAs help eliminate financial roadblocks to health care access without limiting the ability of consumers to choose the health care provider and plan that best suits their needs. At the heart of nonpartisan improvements like this is the desired goal of a more effective, less expensive health care system, driven by the establishment of proper incentives guiding both corporations and consumers.

During the debate, for example, both politicians lamented the tragic results of unaffordable deductibles for patients with severe illnesses. However, ideologically polarized health care overhauls are not the only ways to solve this issue. One need only look at the structure of health care in a country like Singapore for a potential solution. On its face, Singapore’s policy to address the problem of unaffordable deductibles appears counterintuitive. Government funding for health care requires that no health service be provided for free.

In practice, this raises the cost of basic, day-to-day treatments like doctor visits for a mild illness, discouraging unnecessary use of medical care. This policy frees up medical resources to treat more life-threatening cases in a time-efficient and affordable manner.

Singapore also requires citizens to put money into tax-exempt health savings accounts in a program called Medisave, which has the result of discouraging spending on unnecessary medical procedures. The proper alignment of incentives for consumers in Singapore ensures that medical resources can be allocated to the most severe cases, rather than wasted on frivolous or overly expensive medical procedures.

The American health care system could also benefit from incentivising companies that provide medical services and insurance to cut unnecessary costs, without the need for heavy-handed government control. Again, the U.S. can look to the transparent system of Singapore, in which private health care providers are required to publish the prices of their policies.

By providing more information to consumers, this policy creates an environment that encourages health care providers to pursue more cost-effective policies without compromising health outcomes. This relatively light regulation of the industry can have outsized benefits, motivating cutbacks on expensive but ineffective medical procedures that contribute to the United States’ excessive spending on health care.

Another point of agreement between Sanders and Cruz was what they deemed to be the excessive costs of pharmaceuticals, a reality that prevents many Americans from receiving life-saving medicines. Sanders prescribed a greater use of the federal government’s market power as a large purchaser of drugs, while Cruz targeted excessive FDA regulation as the culprit behind high drug prices.

Rather than demonizing corporations as greedy evildoers or decrying safety regulations for drug approval as unnecessary, both parties should once again look to the establishment of proper incentives to craft policies that protect consumers without denying them affordable access to important drugs.

The Swiss system of approving pharmaceutical drugs provides one possible method to properly align incentives to benefit consumers, while still allowing companies to operate without excessive government control. In Switzerland, drug approval is contingent not only on meeting safety standards, but also on satisfying an objective calculation of cost-effectiveness for the new drug when eligible for reimbursement under health insurance plans. A system like this would discourage companies from creating overly expensive drugs, without requiring rigid price controls enacted by the government.

Out of current partisan stonewalling emerges a third, pragmatic path for health care reform in the United States: a focus on properly aligned incentives. Policies like the ones proposed here are driven not by ideology, but by economic evidence. Adopting these measures would be the first step toward the pursuit of a health care system that delivers better results at lower costs—an outcome that would be amenable to politicians and constituents across the political spectrum.

Quantitative easing, explained

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“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

-Federal Reserve Act Section 2A

            Maximum employment, stable prices and moderate long-term interest rates are the responsibilities of the Federal Reserve (the Fed) often known as its “dual mandate.” Achieving these goals is no minor feat. The economy is a complex and unpredictable structure, dependent not only on the performance of businesses, but also slave to human behavior. As Nassim Nicholas Taleb famously wrote, “Think of the economy as being more like a cat than a washing machine.”

So how is the Fed expected to tame this dynamic and volatile system? American monetary policy until late 2008 consisted of adjusting the monetary supply through the sale and purchasing of short term treasury bills, affecting interest rates by setting their overnight risk-free rates and attempting to control public expectations and actions through public statements.

The post-great recession global economy, however, has not been as responsive to these conventional forms of monetary policy. The Fed has maintained a historically large monetary supply, and risk free interest rates close to 0% since the great recession, yet the economy is still resisting maximum employment and healthy inflation rates.

To supplement these insufficient strategies, central banks have turned to Quantitative Easing. Quantative Easing (QE) has become somewhat of a buzzword used to describe a range of policies. It is therefore difficult to construct a concrete definition. A good starting place, however, is thinking of it as any non-traditional monetary strategy consisting of purchasing long-term assets, particularly when short-term risk-free interest rates are close to 0%.

QE1, the first round of American quantitative easing, was essentially a bailout where the Fed acquired mortgage-backed securities (MBS) and funded government sponsored enterprises (GSE). By purchasing mortgage backed securities—a risky long term asset held by many banks at the time of the great recession—they provided relief to banks who were in danger of turning illiquid. Housing oriented GSEs were financed in order to create credit for investments in real estate.

Notice that QE1 resembles fiscal policy more than monetary policy. Without passing an official stimulus through congress, the Fed managed to inject money into the economy and provide incentives for investment. Our definition of Quantitative Easing can thus be updated to reflect this function.

The second and third rounds of Quantitative Easing were extensions to QE1 with one addition. The Fed purchased longer-term treasury bills. These auxiliary rounds of QE had the effect of continuing to increase the monetary base and lowering long-term interest rates, thereby incentivizing even further investment.

Quantitative Easing is any non-traditional monetary policy, which stimulates the economy through the purchase of long-term assets, particularly when traditional monetary policy has failed. The purchase of long-term assets stimulates the economy by lowering long-term interest rates and increasing the money supply, which in turn incentivize lending and investing.

Recently, QE has been used by central banks all over the world, most notably, the Bank of England, Bank of Japan, and the Fed. However, this strategy is not without its critics. Detractors argue that QE weakens the effects of traditional monetary policy and puts central banks in danger of run-away inflation. While these dangers do exist, it is clear that traditional monetary policy is no longer sufficient to reach desired interest rates. While QE may not be the final solution, it has so far seemed effective.

Traditional monetary policy has not been enough to lift us from our global recession. It is clear that central banks need an additional tool to stimulate a healthy economy. QE will be around at least until a new alternative is found. Whether it actually stimulates the economy or simply inflates the prices of assets remains to be seen.

Morality aside, refugee acceptance is a matter of economic benefit

refugee photo.jpegBetween Donald Trump Jr. comparing Syrian refugees to poisoned Skittles and a camerawoman kicking and tripping refugees fleeing the Hungary-Serbia border, the resettlement of refugees from Syria to Western countries has faced much derision and scrutiny. Since March 2011, approximately 470,000 Syrians have been killed in their ongoing civil war and more than ten million have been internally displaced or forced to leave the country. This crisis has caused millions of Syrians to seek asylum in other countries, with many of them dying trying to reach refuge. When it comes to the resettlement of refugees into the United States, unwarranted hate, groundless fear and false information have been rampant. More subversively, when it comes to economic research, refugees may actually posit direct, long run economic benefits.

According to the U.S. Department of State, during the 2016 fiscal year, 84,995 refugees from 79 different countries were admitted into the United States. 70 percent of those refugees came from the Democratic Republic of Congo, Syria, Burma, Iraq, and Somalia. Over 72 percent of those resettled were women and children. The screening process can take between 12 and 18 months, with those in desperate situations receiving priority. Less than one percent of the global refugee population passes the first application for resettlement in the U.S.

Of those refugees who were granted residency in the U.S. this year, 46 percent were Muslim and 44 percent were Christian. Since September 2001, about 785,000 refugees entered the U.S. and fewer than 20 were arrested or expunged for terrorist related activities. A risk analysis done by the Cato Institute found that between 1975 and 2015 the chance of being killed in a terrorist attack on American soil conducted by a refugee was 1 in 3.64 billion a year.

A study conducted by Kalena E. Cortes, Associate Professor of Public Policy at Texas A&M University, compared the fiscal growth of refugees to that of economic immigrants, those who enter a country to improve their standard of living and job opportunities. The research found, “In 1990, refugees from the 1975-1980 arrival cohort earned 20 percent more, worked 4 percent more hours, and improved their English skills by 11 percent relative to economic immigrants.” While these refugees initially had lower annual earnings, they greatly outpaced the economic immigrants in economic gains.

Since refugees lack the option of returning to their home country, their time horizon in the host country is much longer than that of economic immigrants. A longer time horizon means refugees have a higher likelihood to assimilate to the earnings growth of native-born citizens. They are incentivized to invest in “country-specific” human capital, such as learning the language or enrolling in the country’s education system. Also, they have a longer period of time to recoup their human capital investments. Not only do refugees add to the economy with labor, they also contribute through consumption. At a local level, refugees exercise their purchasing power, increasing the demand for goods and services.

In Cleveland, 598 refugees were resettled in 2012, with approximately 4,000 more resettled in the decade prior. The Refugee Services Collaborative of Cleveland spent approximately $4.8 million on refugee services in 2012 and the economic impact of refugees on the city during that year is estimated to be $48 million and 650 more jobs. A report by Chmura Economics and Analytics observed that, on average, the refugees found employment within five months of their resettlement, despite their lack of proficiency in the English language. As the labor market participation and income of refugees increased, the reliance and need for government assistance decreased substantially.

The resettlement of refugees can be viewed as an tool for economic development and regrowth. Cities and regions that accept refugees see an influx of laborers who are initially willing to work for lower wage rates, giving an area stuck in an economic trough the chance to re-energize. The Rust Belt city of Utica, NY lost about a third of its population in the second half of the 20th century when local factories closed, stunting economic growth. However, in the past four decades the Mohawk Valley Resource Center for Refugees resettled about 15,000 refugees from 74 different countries into Utica, completely revitalizing the area. The largest group of refugees, Bosnians who sought asylum during the Balkan conflict, have renovated hundreds of neglected houses and opened their own businesses.

Refugees bring fresh energy, innovation and the desire to rebuild to their new hometowns. A study from 2000 on the fiscal impact of refugees in Utica and Oneida county conducted by Hamilton College found that while resettling the refugees required an upfront cost, it was primarily front-loaded and created a net fiscal benefit for the community in the long run. The study also found little evidence that the resettlement of refugees negatively affected employment of native laborers.

Jeffrey Sachs, a senior UN advisor and director of the Earth Institute at Columbia University, observed that the refugees entering the United States currently are more educated than a typical person from their country. New refugees are also expected to be younger, giving them a greater chance to “make it” in the American economy. An investment in refugees not only saves people from dangerous and dire situations, but also brings new life and value into the local, regional and national economy.

Clean energy to carry on under a Trump Presidency

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On the campaign trail, President-elect Donald Trump promised to prioritize America’s energy needs by ending restrictions on coal companies. To many environmentalists, there is an implicit threat in this commitment to U.S. energy dominance: clean energy sources will face their demise as government interest in supporting the industry wanes. Furthermore, there is fear that a lack of U.S. commitment to clean energy will have a contagion effect on other nations, encouraging other countries to abandon climate agreements like COP21. On the face of it, a Trump presidency seems to herald doom for the future of clean energy.

In reality, the fate of clean energy will likely be far from catastrophic. Rapid improvements in technology for renewables like wind and solar mean that most of these products will be cost competitive with traditional fuel sources by 2025 without subsidies, while solar and wind can already compete in some geographic areas. A pro-coal president is thus unlikely to be the killing blow for the clean energy industry. Alternative energy sources like solar and wind will continue to improve and eventually replace outdated, environmentally damaging energy sources. Concern should instead center around the environmental damage that will occur in industries like coal until such a substitution occurs.

The ongoing maturation of alternative energy has ensured it will be a mainstay in the global economy in the future. While still expanding, the clean energy industry has improved far beyond the first, inefficient attempts at harnessing fuel from environmentally friendly sources. The future profitability of this industry as a large-scale energy provider is under little doubt, especially as many renewable energy sectors have matured sufficiently to near-price competitiveness with “dirtier” energy sources.

In most cases, clean energy firms no longer face an uncertain future about their viability in a competitive energy market. As a result, these firms will not suffer the chronic underinvestment that plagues infant industries, making it probable that private investment will fill the void left by a reduction in subsidies. This benefit is especially likely for firms that have moved from research to development stages for their clean energy products, as the commercial viability of such products becomes more apparent and thus appealing to private investors.

Even if the increased quantity of private investment does not entirely replace the funds provided by subsidies, clean energy industries may still benefit from the improved innovative efficiency of private investment. While subsidies add to the total quantity of innovative expenditures made by receiving firms, innovative efficiency has been found to suffer with government subsidies in many cases. More efficient allocation of investment capital would spur improved innovation rates, further making up for any loss in public investment. This results in part from the greater flexibility of private investment, which is better able to keep up with changing market conditions like the entry of new firms compared to more cumbersome public subsidies.

Globally, clean energy will also likely maintain its potential as a replacement for dirtier energy sources, regardless of the direction American energy policy takes. The U.S. currently constitutes a significant share of global energy consumption (18% in 2013), but other large, developing nations like China and India are increasing their shares of energy consumption as they expand their economies. While many expect these countries to do so through dirty energy sources, the reality is that developing nations already make up over half of all renewable energy investment globally. These countries do so because it is the cheaper option, due in part to the lack of fossil fuel infrastructure already in place.

As these nations continue to expand their energy infrastructure in the coming years, demand for renewables and other clean fuel sources will only increase, ensuring a bright future for the clean energy industry outside the U.S.

All of these factors will ensure the clean energy industry’s continued rise toward becoming the primary producers of fuel in the world. The environmental implications of a Trump presidency are not entirely positive, though. Proposed cuts in regulation of the coal industry that would accompany a reduction in subsidies for cleaner sources will result in greater production of environmentally harmful energy as the coal-producing firms would no longer pay for their pollution costs. Thus, there remains valid concern over environmental damage as a result of Donald Trump’s policies for the coal industry. These fears, however, are far more limited in scope and severity so long as clean energy continues along its path of innovation and expansion throughout the world.

 

Ireland’s Brexit Dilemma: How Britain’s Decision to Leave the E.U. Could Impact the Irish Economy

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British Prime Minister Theresa May speaks to Irish Taoiseach (PM) Enda Kenny

In the months leading up to the UK’s Brexit vote, Irish officials advocated for Britain to remain in the EU and stressed the close ties that Britain and Ireland have. However, the Brexit vote did not go as many in the Irish government had hoped. As the UK prepares to trigger Article 50 and formally begin the process of exiting the EU by March of next year, the Irish government is preparing to deal with the effects of one of their closest trade partners and neighbors leaving the largest trade block in the world.

In assessing the effects of Brexit, many analysts focus primarily on how the British economy would be impacted. Yet the effects of Brexit extend far beyond Britain itself. Ireland and Britain have close ties due to shared history and geographic proximity. Furthermore, when Britain and Ireland joined the European Economic Community in 1973, the Irish economy was still heavily reliant on Britain for many products that it was unable to produce itself. While Ireland has become much less dependent on the British economy over the last few decades, the two countries still have close economic relationships, and for Ireland, it looks like Britain’s departure from the EU is going to hurt. A recent study by the Irish Department of Finance estimates that Britain’s departure would cause Ireland’s GDP to drop by as much as four percent, with negative effects on wages and employment in Ireland lasting for the next 10 years.

Britain and Ireland trade heavily with one another, and a Brexit will likely damage the Irish export market and lead to higher import prices. Every week, Ireland and Britain trade approximately €1 billion worth of goods and services. Ireland sends 16 percent of its exports to the UK, the most it sends to any one country, and Ireland’s Economic and Social Research Institute estimates that bilateral trade between the two countries could decrease by as much as 20 percent after Britain leaves the EU. Overall, Ireland has a trade deficit in merchandise with the United Kingdom, and its agricultural and metals sectors heavily depend on exporting to the UK.

For instance, 50 percent of Irish beef exports go to Britain, as do 55 percent of construction and timber exports. The UK is also Ireland’s greatest source for merchandise imports, and as Ireland’s economy is small, it has fewer opportunities to substitute imports with locally produced goods. Once the UK leaves the EU, it will likely be subject to the EU’s import tariffs for imports coming from “third countries.” The institution of tariffs for imports into the UK from Ireland and vice versa, therefore, will likely lead to higher prices for goods sold in Ireland.

Both Ireland and the UK have expressed interest in keeping the Common Travel Area (CTA) that has existed along the border of Ireland and Northern Ireland since 1923. Over the past 90 years, this invisible border has facilitated trade between the two nations, allowed citizens to work in each others’ countries, and has contributed to political stability in Northern Ireland. However, once Britain leaves the EU, the border between Ireland and Northern Ireland will become the western border of the EU, which may require passport controls that would greatly restrict movement between the two countries. Currently, the British and Irish governments are exploring ways to keep the CTA after the Brexit occurs.

No one has a greater potential to gain from Brexit, however, than Ireland’s financial sector. The UK has the largest inward FDI (Foreign Direct Investment) stock of any nation in Europe and has a powerful financial services sector. Leaving the EU’s single market will likely damage that financial vitality and could spur many firms to relocate all or part of their operations to cities in other countries. As an educated, English speaking city that already has a sizeable financial sector, Dublin is definitely a strong candidate. Currently, Ireland is home to €3 trillion of investment and money market funds. With some additional investments in housing, communications and infrastructure, Ireland and Dublin especially would likely benefit from firms in Britain relocating abroad.

In her speech at the Conservative Party Conference in October, Theresa May declared that “Brexit means Brexit — and we’re going to make a success of it.” Both the Irish and the British certainly hope so. The less dramatic Britain’s departure from the EU is, the better off Ireland will be. As Irish political commentator Johnny Fallon notes, “Some in Europe would be very happy to see post-Brexit Britain collapse. Not Ireland. We’re very eager to see Britain hold up.”

The economic case against slavery

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In 1981, Mauritania became the last country in the world to abolish slavery, putting a supposed end to the archaic institution, yet there are an estimated 30 million people illegally enslaved across the globe today. The abhorrent ethics of the practice have not stopped many governments from letting modern slavery slip through the cracks. In order to convince governments to take real action, we must prove that slavery is an economic burden, and an investment in eradicating it will produce returns.

Slaves were once an expensive capital purchase, but rapid population growth in the mid-twentieth century has led to a sharp decrease in the cost of slave labor. Furthermore, unregulated migration systems in many countries have left a lot migrants with minimal information about legal migration and their rights. This has made it easier for criminals to exploit and traffic migrant labor. The International Labour Organization researched the flow of migrant workers into forced labor and found that migrant workers encompass a large percentage of trafficking victims. Business owners who wish to utilize this cheap, disposable labor can achieve higher profits compared to those that pay their laborers a wage, preventing money from flowing naturally from employers to employees and back into the economy by consumption. However, while slavery is profitable for criminal business, it is a drag on the economy as a whole.

Many impoverished, uneducated civilians who are desperate for money are tricked into taking out a loan where labor is demanded as repayment. According to Anti-Slavery International, bonded labor has become the most widespread form of modern slavery in the world. Bonded slaves become illegally trapped in servitude as that loan is extremely difficult to repay and the debt passes down each generation. Slavery flourishes in places with extreme poverty. In fact, it perpetuates poverty as slave labor decreases the wages for unskilled, free laborers, reducing the disposable income of free families. The research of Kevin Bales, co-founder of the human rights organization Free the Slaves, has shown that the first investment former slaves want to make is putting their children in schools. Education is crucial in combating poverty. First, education helps prevent the spread of poverty between generations. Second, learning to read, write, and think critically greatly increases one’s economic rate of return. As long as governments will not do anything to stop the illegal use of slavery, freedman labor remains an untapped resource in an economy.

The article “Slavery is Bad for Business” by Monti Narayan Datta and Kevin Bales states that the production output of slave labor is remarkably low due to a lack of incentives, lack of human development and lower life expectancy. They are not working to their full capacity and, consequently, have low economic value. When slaves are freed, the local economy booms as these people now act as economic agents. There is a greater incentive to increase productivity and their human capital since they are now supporting their families and exercising labor autonomy. Not only do they contribute to the economy through work, but also through consumption as active members of society with purchasing power.

Despite slavery’s persistence, education and legislation designed to hold businesses accountable for their use of servitude in the lower end of their supply chains have proven effective. For example, the California Transparency in Supply Chain Act mandates that any company with worldwide annual revenue above $100 million publicly discloses what they are doing to eradicate human trafficking and forced labor from their supply chain. If companies consciously work to stop purchasing intermediate goods produced by slaves, the demand for slave labor will decrease.

The second, critical step is to invest in freeing slaves and giving them a real chance at living a productive, healthy life. This step is crucial in ensuring the long-term success of those freed from slavery. Bales describes the freeing of slaves in the United States as the “botched emancipation of 1865” where millions of former slaves were left without access to education or political autonomy. Instead they were faced with discrimination and violence, which continues to resonate through society today. Without giving people some sort of chance, they are more likely to fall victim to other types of exploitation.

Ethics aside, slavery is not being addressed aggressively enough by governments around the world. If they looked honestly at the economic ramifications of a monstrous system that refuses to die, only then may governments be coerced to act.

Beyond Populism: The Importance of Punishing White-Collar Crime

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Elizabeth Williams/Bloomberg News

Late last month, The Economist published an article, “Jail bait,” arguing that the increased pursuit of criminal charges against white-collar workers is merely a symptom of America’s populist desire to vilify the wealthy. The article further asserts that not only is charging individuals costlier than charging firms, but also that individuals should not be held liable for their actions due to a system that promotes white-collar crime. Finally, the article claims that heightened enforcement can prove detrimental to innovators like Uber and Steve Jobs, who often walk the line of legality and morality when creating new businesses in the face of outdated regulations.

These arguments fail to acknowledge the potential benefits stemming from the punishment of white-collar criminals. Through stronger enforcement, both consumers and businesses can gain from an economy in which individuals are held accountable for breaking laws. Improved consumer trust in sellers of financial products is more conducive to economic well-being than allowing white-collar workers to skirt laws without consequences.

Calls for the increased punishment of white-collar criminals should not be mischaracterized as seeking “punishment simply because they are rich and successful.” In fact, criminal punishment actually holds the potential to improve the economic well-being of white-collar workers. This results from greater trust and transparency in white-collar industries, as consumers believe that rules and regulations are being adequately enforced to ensure fair dealings. Consumers are willing to pay a premium for products they trust, increasing both the quantity they demand and the price they are willing to pay due to the obvious benefit of knowing that they will not be victims of fraud or other crimes.

Contrary to what the article suggests, the economy may in fact benefit from the increased enforcement of white-collar crime, as taxpayers would face lower costs. While the actual costs of enforcement would likely be higher due to the greater number of cases brought against individuals, deterrence should also be weighed in the decision of which method to employ. In my last article, I referenced a study from Cindy R. Alexander showing that criminal charges can be a stronger deterrent to illegal behavior than fines. As a result, the savings from avoiding the damaging impact that white-collar criminals can have on the economy may offset the greater costs of pursuing these punishments in court. For example, the recent financial crisis – due in part to misleading information on the riskiness of mortgage-backed securities – greatly hurt consumer demand and hampered economic growth for years to come. Therefore, deterring future white-collar crime and its potentially damaging economic consequences should be factored in when assessing the true costs of enforcement.

It is also a dubious claim that punishing white-collar criminals would deter innovators driven to violate obsolete regulations. Though it may be true that entrepreneurs like Steve Jobs and Bill Gates engaged in activities that brought them into conflict with enforcement agencies, this does not prove that these actions were necessary to the success of their societally beneficial companies. In fact, these anecdotes do not provide any causal evidence that punishing white-collar crime will stifle the innovations of the entrepreneurial process. It is reasonable to call for changing regulations when they are outdated and inhibit innovation, but this should be decided through proper legal channels.

Nor can the blame be shifted entirely to a corporate culture or business environment that promotes wrongdoing. Fiduciary duties hold corporate managers accountable to the best interests of shareholders and to the laws regulating the operations of their businesses. Thus, unlike the article suggests, corporate managers, not just firms, would be liable when in violation of these duties. To fail to punish white-collar criminals in these instances would enable those individuals to escape accountability to their fiduciary duties.

By reducing the trend of increased punishment for white-collar crime to a bitter, populist movement, The Economist’s article fails to acknowledge the potential benefits of such a policy. Ultimately, more studies should be conducted to analyze the impact of increased enforcement on rates of innovation to determine whether there is a causal link. Even if an impact is found, though, it merely suggests a need to update regulations with greater speed to account for changing economic conditions. To realize the potential economic gains from greater trust in financial firms, punishments for white-collar criminals must be adequately enforced. Such an effort extends beyond populism in its intent to improve the economic well-being of all parties, consumers and businesses alike.

“Trumped-Up Trickle-Down” and What It Means

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In the first general election presidential debate, Republican nominee Donald Trump proposed one of his only concrete policies as a candidate: to cut taxes across the board, including a reduction in the corporate income tax rate from 35 percent to 15 percent. Democratic nominee Hillary Clinton called it “Trumped-up trickle-down,” alluding to Ronald Reagan’s so-called trickle-down economic policies of the 1980s. According to economist Heinz Arndt, the expression “trickle-down” implies a vertical flow from rich to poor that happens of its own accord. Tax cuts for higher-income individuals are meant to boost economic growth, as those individuals invest and spend the money saved on taxes. The corresponding increase in capital will create a need for more jobs, as higher investment means higher demand for goods and, eventually, an increase in wages. The same principle holds for giving tax cuts to corporations. If a corporation’s taxes are cut, the idea is it will use that money to either hire more workers or pay current workers more. In essence, the well-endowed will have more wealth to “trickle down” to lower economic classes.

In theory, it’s not a bad policy; in practice, it hasn’t worked. In the 1980s, Reagan proposed huge tax cuts across the board, especially for the highest-earners. The outcome of this policy was that the U.S. national debt roughly tripled during Reagan’s term, and income growth shifted from the bottom classes to the top classes. As you can see from the graph below, the Reagan tax cuts boosted income growth for the top 10 percent of income earners, while the bottom 90 percent of earners saw their income growth decline after the 1980s. This means that the highest earners earned even more, while income growth for the lowest earners slowed and eventually declined. Under Trump’s proposed tax cuts, this process is likely to repeat itself, widening the wealth and income gaps even more.

Graph 1

According to a study by the Tax Justice Network, money that the wealthy accumulate through tax cuts is more likely to be moved to an offshore bank account than reinvested in the national economy. Corporate tax cuts may be used to give top executives bonuses or to fund the relocation of businesses to developing nations. While divesting from the American economy has the potential to make goods cheaper, the second plank of Trump’s proposed fiscal policy – extreme protectionism – would make his trickle-down tax cuts even worse.

Trump seeks to impose a 45 percent tariff on all imported products from China to the United States, meaning that any product coming from China will be marked up an extra 45 percent. Trump’s intention is to discourage companies from moving their factories to China, and instead open or maintain their factories in America. Except trade is incredibly beneficial to both countries involved. Trade allows countries that have a comparative advantage (meaning it is cheaper to produce one good compared to another in that country) to specialize at what they are best, whether it be abundant natural resources or a highly skilled labor force. Comparative advantage is why Southeast Asia produces most of America’s clothing and America produces most of the world’s high-tech products.

The reason we import products from China is that it is cheaper to import them than to produce them domestically. China’s comparative advantage in certain industries means that they can hire more workers and pay them less, making the final goods cheaper for American consumers. Imposing a tariff on all goods from China would effectively raise domestic prices, which would defeat the purpose of lowering taxes. For example, nearly 50 percent of U.S. imports from China are machinery and electronics, meaning a 45 percent tariff would make a large portion of consumer goods more expensive. Without an increase in wages, this increase in the price level would diminish the purchasing power of everyday Americans.

Overall, Donald Trump’s fiscal policy is comprised of two objectives that will do more to harm the economy in the long run than help it. It won’t create jobs, and it won’t raise wages. It will also make the rich richer and the poor poorer, enlarging the already vast wealth gap. Overall, Mr. Trump’s policies will benefit Mr. Trump personally more than they will benefit any average American who is so gladly voting for him. “Trumped-up trickle-down” economics is exactly what it says: a trickle-down policy on steroids.

Everbooked and Dynamic Pricing in the Share Economy

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We live in an era of sharing. Technological developments and online platforms allow people today to network and earn extra income by sharing assets they already have – their cars (Uber and Lyft), their household goods (Snapgoods), and even their homes and apartments (Airbnb, VRBO, and HomeAway). Collectively, this activity is known as the “share economy,” and it is rapidly growing. Participating in the share economy is simple: go online, or open an app, and in minutes you can find a ride or a place to stay for the weekend.

Founded in 2008, Airbnb allows users to rent a place to stay overnight in a private home or apartment. Having personally used Airbnb, I can attest to the benefits of renting a private place while on vacation it’s often less expensive than a hotel, there are more options to choose from, and staying in a private place has a “local feel.” As Airbnb advertises, “Don’t go there. Live there.” This online platform has proven very popular: Airbnb today is worth around $24 billion and has helped over 40 million people find a place to stay. As Airbnb’s rapid growth both in the United States and abroad continues, Airbnb landlords are taking advantage of data science in order to raise more revenue and secure a greater number of bookings. Recently, I had the opportunity to speak with David Ordal, the CEO of a Bay-Area startup known as Everbooked that assists Airbnb landlords with market analytics and a technique known as dynamic pricing.

Dynamic pricing involves continually adjusting prices to adapt to changes in demand that are detected through data analysis. American Airlines is credited with being the first company to adopt this technique; in the early 1980s, it began experimenting with “Super Saver” ticket prices that were adjusted based upon seat availability, demand, and how far in advance customers made reservations. The results were impressive – American Airlines’ revenues skyrocketed the next year. Dynamic pricing is now universal in the airline industry, and the hotel industry has used dynamic pricing for a long time as well. Ordal founded Everbooked in 2014 when he noticed that dynamic pricing was not widely used in the vacation rental industry. He saw an opportunity in bringing dynamic pricing and data analytics to landlords renting through Airbnb. “We do the same thing as airlines, but for a place to stay,” Ordal explained. Today, Everbooked operates in 3,322 cities across the United States and looks to expand internationally in the future.

Everbooked uses an algorithm to scan through market data in real time, searching for changes in various demand factors. “We look at different factors for demand, such as seasonal trends and weekend and weekday tracks,” Ordal said. He noted that, in some cases, weekdays actually see higher demand than weekends, often due to business travelers. In addition, the algorithm tracks Airbnb reservations in a given area and even examines local FAA air traffic data, which has proven to be a good metric for predicting how many people are traveling to and from a particular locale. When the algorithm detects something notable, it automatically updates users’ prices within hours of detection. The end result is that, by having their prices updated in real time, Airbnb landlords can earn an extra 14-38 percent in revenue each year.

“A lot of clients are professional landlords,” Ordal added. “We work with hosts who are more business-oriented. These are the people who really want to understand the market, who really want to understand analytics.” In addition to automatically updating clients’ prices, Everbooked also compiles huge amounts of data on rental units in various locales across the United States, allowing clients to compare their listings to those of other nearby Airbnb landlords. On the Everbooked website, an Airbnb landlord can see what types of listings they are competing against – whether homes, apartments, or condominiums – and the average prices for each of these types of listings throughout the year. Several histograms display which prices are the most common among various types of listings, as well as which types of listings are the most popular in a given locale. Everbooked also creates graphs to help clients determine the prices they should charge for extra guests, and provides up-to-date information on seasonal demand trends.

At one time, the benefits of dynamic pricing were limited to large, highly organized businesses. Today, with the rise of the share economy, that landscape is dramatically changing. Ordal thinks that someday dynamic pricing will become universal among vacation rentals. I agree – there are simply too many benefits to pass up.