Baldwin Wallace University Economics Blog ... thinking out loud ...: November 2011

Sunday, November 27, 2011

...what, exactly, is the reason for the season?

By kay.e.strong

…hyping holiday bargains the first weekend of October

…fifty-five shopping days front-loaded onto the traditional holiday season

…even before the thanksgiving turkey has digested, millions lept headlong from Red Thursday into the Black Friday frenzy

…pepper-spray becomes the defensive tool of choice for “bargain” hunters

…gun-toters brandish their weapon to motivate those in line ahead of them

…counter stampedes injury fellow shoppers

…police knock a shopper unconscious

…a mugging goes badly; victim left shot and bleeding in the parking lot

Given the evidence, I’d conclude the reason for the season is to celebrate the value Americans are world-renown for: “self-righteous” greed. Self-righteous, in sense that, we truly believe in our entitlement to stake a claim to all that money can buy. Because the American economy--with a bit of help from the might-makes-right department—consistently spins an oversized share—a quarter of the world’s gross domestic product (14.5/ 63 trillion dollars in 2010)—to Americans, we assert a god-given right to shop 'til we drop. Despite overflowing closets, packed garages, and self-storage units and mini-warehouses, Americans seem unable to satiate their lust for stuff.

To regain perspective on the reason for the season, let’s check out our Ecological Footprint < http://www.footprintnetwork.org/ >. An Ecological Footprint is a metric that calculates humanity’s demand on nature. More specifically, “[i]t aims to show the interdependence between a country’s biocapacity, its economy and ultimately, the well-being of its people.”

The Ecological and Biocapacity Report for 2007 shows America--an ecological debtor nation. Americans consume 8.0 hectares (of global resources) per capita and our nation’s biocapacity is 3.9 hectares per capita, thus, our ecological deficit—yup, chalk up another one for us—is 4.1 hectares per capita—translated: a 4.1 hectares deficit per every man, woman and child in the country. According to the Global Footprint Network (GFN), a non-profit organization, if everyone in the world lived the lifestyle of the average America, we would need five planets. But we have only one planet, one future—from which all peoples have an entitlement to live satisfying lives.

As the economic winds of world fortune shift ever more easterly, the excesses of Americans will be put in check. GFN reminds us that “[a]s resource pressures escalate, ecological wealth will play an increasing role in determining countries’ competitiveness and its citizens’ ability to lead secure, rewarding lives.” Today’s fight over global oil supplies will pale in significance to the pending wars over water and food.

Please, before the next mall surge, take time with your family to view The Story of Stuff < http://www.storyofstuff.com/ >. Make it a holiday classic--along with a heart-felt conversation about giving back to the planet we share with 7 billion other inhabitants of our future. Let’s put sensibility and compassion back into the reason for the season.

Kay Strong, Ph.D., Southern Illinois University, M.T., University of Houston, M.A., Ohio University; Associate Professor at Baldwin-Wallace College; Areas of expertise: international economics, contemporary social-economic issues, complexity and futures-based perspectives in economics. E-mail: kstrong@bw.edu

Sunday, November 20, 2011

...the proof's in the pizza!

By kay.e.strong

Legislating pizza a vegetable is blatant evidence of a puppet Congress wholly owned by Corporate America! It’s time to cut the strings. And I have a cost savings tip for the Deficit Reduction Commission.

Dissolve Congress!

We get an immediate 5 billion dollars and change in savings from the Legislative Branch budget (2012). http://deathandtaxesposter.com/

Dissolving Congress serves two useful purposes.

First, it eliminates the political façade that governance in the US is even remotely representative--that the voice of the people is alive in Washington. Corporate America owns the country. Its will has been the will of the people—whether the people knew it or not! No one needs a “pass-through” agency. It’s time to open our eyes to the truth. Swallow hard and let go of that trite nonsense taught in high school government class and call reality--reality.

Second, the cost savings from dissolving Congress helps the Deficit Reduction Committee move closer to their 1.2 trillion dollar goal. No need to drag us through another political temper-tantrum, aka gridlock, sabatoge maneuvers and stock market upheavel because Corporate America isn't getting its way. Automatic cuts across the board can be handle with a nice clean algorithm. No partisan politics needed. We get the same end results either way.

In effect, dissolving Congress become a win-win for everyone.

Corporate America’s profits will rise since members of Congress will no longer be on the payroll and channeling funds through PACs will no longer be necessary.

As usual, the American people will continue to get the short end of the stick—no real change here. But, at least, we won’t be confused by the political slight of hand tricks.

The 535 members of Congress and their staff and their staff’s staff will have the dubious honor of getting real jobs. Yes, it's possible that their income sans corporate kick-backs may suffer. But no harm…just let’em eat pizza—the nation’s newest veggie!

Sunday, November 13, 2011

...an invitation to stand with the 70%

By kay.e.strong

American shoppers are the most powerful economic group on the face of the earth! In America alone we are in control of 70% of GDP spending. That’s three times more than the federal government spends. It’s twelve times more than the war department!

Individually, we think of ourselves as weak…but every powerful force on earth is a composite of individual elements acting in unison. Drops of rain collected together have the power to become game-changing raging tornadoes, surging tsunamis, and even magnificent waterfalls.

We hold in our wallets the power to transform the world.

Wanta’ put an end to corporate greed? Stop it at its source…your pocketbook! Don’t buy their stuff. Want to encourage corporate social responsibility? Buy only from businesses exercising social responsibility. Shun businesses that hold the local community hostage to tax write-offs in exchange for jobs. Hold profiteering corporate farms responsible for wreaking havoc on the soil, polluting our waterways, belching particulates into the air and denigrating the diversity of the biosphere.

Wanta’ stop the epidemic of obesity and chronic disease? Pay attention to what you drop into your shopping cart. Don’t put fat-drenched, high-fructose corn syrup and sugar-laden foods into your mouth or your child’s. Don’t create demand for these foods. Send the government a message that Americans want agricultural subsidies (some $100 billions) re-routed to support “healthy” eating choices of farm fresh fruits and vegetables. Become a patron of the local farmers’ market.

Wanta’ send commericalizers of Christmas a message? Don’t participate in the buying frenzy being foisted on us. Stay away from the malls, the big box stores, and the online shiny gizmos and gadgets. Send commercial propagandizers the message that we are no longer listening--that we can indeed live a life void of “more stuff” to jam behind an already overflowing closet door.

Refocus on what really matters in life. Strengthen your local community by giving back. Bring the gifts of trust, compassion and cooperation. These are the gifts that keep on giving!

You have cash in your wallet! Seize your right to turn the tables on an insensitive government, big-moneyed politicians, and responsibility-challenged corporations. Don’t play on their terms.

Wait patiently on the data crunchers to affirm the power of the American Consumer.

We are the 70%! We alone can bring the change needed to America. Mindfully cast every dollar vote you pull from your wallet.

Sunday, November 6, 2011

Frankly, I'm Confused (What's New?)

By Lewis Sage

Frankly, I'm confused. Robert H. Frank, the excellent Cornell economist, writes about taxes and income distribution, recently published a new book, The Darwin Economy, and has a regular blog in the New York Times (http://www.robert-h-frank.com/timescolumn.html). Frank Rich, who until his recent retirement was a fine columnist for the Times, may have started as a theater critic, but ended his stint on the Op-Ed page with essays on finance and the public interest like “The Tea Party Wags the Dog” and “At Last, Bernie Madoff Gives Back” (http://topics.nytimes.com/top/opinion/editorialsandoped/oped/columnists/frankrich/index.html). To top it off, Robert Frank, who writes about wealth for the Wall Street Journal (http://blogs.wsj.com/wealth/), has authored two recent books, Richistan (2007) and The High-Beta Rich (2011), about the meteoric trajectories of the spectacularly well off in 21^st century America. And, as if willfully to confound the issue, Robert goes so far as to cite an earlier book, “The Winner-Take-All Society, by Robert H., no relation” (p. 18), in High-Beta. Clear? No wonder I’m confused.

In an effort at least to distinguish Robert Frank from Robert H. Frank, I’ve just finished High-Beta and have ordered a copy of Darwin Economy.

OK. So what Frank is on about is that the increasing concentration of income at the top end of the income distribution (see my last couple of posts, “Trick or Treat” and “PS…”) and the increasing volatility of the incomes and spending patterns of the top few percentiles mean that our economy is itself more and more a volatile reflection of their experience. He draws heavily on the work of Parker and Vissing-Jorgensen to document the increasing magnitude since WW II of income swings in the top 1% as compared to the rest of us. In the days of my youth, the income streams of the wealthy were much less volatile than the average (beta < 1), but over time that has changed as income increases have become more concentrated and the income of the richest have come to depend less and less on manufacturing and more and more on financial instruments. In the 1%, beta is about 2; in the rarified top 0.01%, it’s over 3.

And that’s enough to scare anyone, particularly anyone whose job it is to forecast state tax revenues. Toward the end of High-Beta, Frank cites Hill and Williams, “By 2007, the top 1% of California’s taxpayers were … earning 25 percent of all income and paying 48 percent of the state’s income taxes.” (p. 180) Clearly a recipe for disaster when you have to balance the budget, whatever the revenue shortfall. Increasing concentrations of increasingly volatile incomes are bad enough. What makes it worse is that the spending patterns of the rich and famous have apparently become as wild and crazy as their incomes. High-beta consumption has been paired with high-beta incomes. The spending fraction for the high-beta wealthy is above that of average households! is Gone are the days of conservative buy-and-hold finance. It’s been replaced with innovate, develop, liquidate and spend. Diversification has been replaced with leverage, and Frank’s narrative is replete with stories of spectacular financial catastrophe (bankrupt former billionaires, repossessed Gulfstream 550’s, the collapse of Yellowstone Club World) that serve as a titillating counterpoise to Richistan, his catalogue of wretched excess. But without a hint of schadenfreude. In fact, he ends with the tale of yet another Frank (Kavanaugh), a low-beta millionaire and a model of rectitude and self-restraint, whose goal is to create value and jobs. “Look at the banking industry,” he is quoted as saying (p. 204) “… they don’t have real expertise in a real business, and I’m not sure they’re creating lasting value.” Frankly, words to live by.

Hill, Elizabeth and Bradley Williams. “California’s Changing Income Distribution” Legislative Analyst’s Office (8/2000)

Kapur, Ajay. “The Global Investigator; Michael Moore, Misrepresentation and Migrating Plutonomies” (2009)

Parker, Jonathan and Annette Vissing-Jorgensen. “An Increase in Income Cyclicality of High-Income Households and Its Relation in the Rise in Top Income Shares,” Brookings Papers and Proceedings (2010)

_______________. “Who Bears Aggregate Fluctuations and How?” AER (2009)

Dr. Lewis C. Sage (AB Kenyon, PhD U. Maryland) likes intersections. Since 1991, he has taught Law and Economics, Mathematical Economics, and the Economics of Healthcare. A former Fulbright Fellow (Bulgaria 1995-6), he teaches an interdisciplinary Honors seminar, Enduring Questions, and is studying strategy in the NFL draft with faculty and students in Sport Management and Psychology. E-mail: lsage@bw.edu

...a new best friend?

Bykay.e.strong

Will China ride to the rescue of the Europeans? President Sarkozy lent his support to a proposal encouraging Klaus Regling, the current CEO of the European Financial Stability Facility (EFSF) to make contact with Beijing. Zhu Guangyao, finance minister, and Klaus Regling met. Adopting a wait-n-see posture, China made no commitment to the 1.4 trillion dollar bailout fund.

Financially, the Chinese do have the resources to act. Currently, China is the top creditor to the US, underwriting the federal debt ($14.9 trillion). The Federal Reserve reported China’s holding at $1,137.0 billion, about 25% of total foreign holdings of US Treasury securities at the end of August 2011.

According to Chinese government figures, its foreign exchange (FX) reserves rose from $216 billion in 2001 to $3.2 trillion as of June 2011, and its reserves as a percent of nominal GDP grew from 15.3% in 2001 to 48.4% in 2010. The main contributors to this accumulation are China’s large trade surpluses ($185 billion in 2010), inflows of foreign direct investment into China ($106 billion in 2010) and inflows of “hot money.”

The CRS report China’s Holdings of US Securities (26 September 2011) argues that “China’s central bank is a major purchaser of U.S. financial assets, largely because of its exchange rate policy. In order to limit the appreciation of China’s currency, the renminbi (RMB), against

the dollar, China must purchase U.S. dollars.” This has led China to amass a huge level of foreign exchange (FX) reserves of which analysts estimate the dollar composition to be around 70%.

The report suggests that rather than hold dollars (and other foreign currencies), which earn no interest, the Chinese central government has converted some level of its foreign exchange reserve holdings into U.S. financial securities, including U.S. Treasury securities, U.S. agency debt, U.S. corporate debt, and U.S. equities.

China certainly appears to have the ability to provide a line of credit to Europe but does it have the willingness?

Perhaps, not. The world has historically been less than kind to China, treating China as a second-class citizen. China may choose to hold out for an improvement in the terms of the trade--not economic but rather political. What change(s) might the assumption by China of the role of lender-of-last-resort set in motion?

First and foremost, the chief lender to the world would seek a more level playing field. With the exception of its UN Security Council seat which it had to wrestle from Taiwan, China’s status in most organizations is at odds with its true economic stature.

It has no representation among the Group of Eight (G8), the economic forum of the major world economies. The G8 is currently populated by Canada, France, Germany, Italy, Japan, the United Kingdom and the US with Russia added in 1997. Ironically, in 2010 China surpassed Japan to become the world’s second largest economy and the International Monetary Fund (IMF) projects that the Chinese economy will surpass that of the US in real terms in 2016.

At the International Monetary Fund (IMF), the organization responsible for ensuring exchange rate stability, China holds a 3.55% voting share and the US, a 16.17% voting share.

In the International Development Association (IDA), the organ of the World Bank responsible for providing loans to the poorest countries, China holds 4.4% voting power and the US 15.85%.

China finally gained a seat at the World Trade Organization (WTO) table in December 2001. Since then, China has been a complainant in eight cases involving either the US or the European Union and a respondent in twenty-three cases—seventeen of which were brought by either the US or the European Communities.

China is destine to gain full admission to the Club of the World. China is vast territorially, some 9.5 million square kilometers. China is the most populous nation accounting for nearly 20% of world’s population. China has the second largest world economy. It has a labor force of over 800 million. A study conducted by the Royal Society, the UK’s national science academy predicts that China will overtake the US as the world’s leading producer of research as soon as 2013, returning China to its historic role as a global leader in technology.

Only time will tell whether China will assist the Europeans. But one thing is certain, the time has come for some honest soul-searching about inclusion and cooperation in the decisions affecting the world.