It is becoming harder to back the claim that the economy isn’t doing well because the private sector isn’t doing well. The evidence from this article further falsifies Governor Romney’s opinions claiming the private sector is in a disastrous state. If wealth was distributed more evenly, we might not see as many people in America desperate for jobs, or Americans working longer hours than ever before just to survive and fulfill their basic needs. The private sector does not need fewer taxes and fewer regulations. It needs to be restructured in a way that fairness can be restored.

Despite the cries from the wealthiest 1%, Obama is doing this country a favor by raising taxes. The wealthiest people at these corporations are making money at increasingly easy rates, while the rest of America suffers through working long hours for the lowest relative wages this country has ever seen. It is time for a restructuring of this economy and it starts with the re-configuration of corporations. The government needs to step in, because the market is not restoring these imbalances.

Henry Blodget put it most accurately when stating, “Our current system and philosophy is creating a country of a few million overlords and 300+ million serfs. That’s not what has made America a great country. It’s also not what most people think America is supposed to be about.” (With all of this said, we must still consider how this “equality” would affect individual’s incentives. One can only hope that these high earners woudn’t just relocate to a more “tax friendly” country.)

Capitalism: The Relationship Between Politics and Economics

By: Adrian Nardella and Luke Rebecchi.
Edited by: Jonathan Burns and Benjamin Virkus

By now, after decades of incessant repetition, free markets and capitalism are inextricable. Taken together or standing alone, these words sanctify a tradition of economic thought and political action. We consider capitalism a synonym for free markets and freedom. But might there be unspoken benefits of capital and its owners? As noted by Karl Marx, capitalism implies an imbalance that favors business owners to the dismay of laborers. The revolving door between big business and politics may explain why this balance emerged. More appropriate are its effects as seen throughout the modern world today.

Recent policy reflects the imbalance mentioned above. In the same year Bill Clinton signed the North American Free Trade Agreement (NAFTA), which promoted trade across the southern U.S. border, construction of a border across Mexico commenced. The message is clear, and continues to resonate: we do not grant labor the same rights as the owners of capital. Last week, The New York Times ran a three-part series on state/local government-issued tax expenditures for businesses. In order to attract ‘job-creators’ to their district, local governments have annually forgone over $80 billion (a conservative estimate) in taxes. When governments grant big business money to turn the lights on, it is done under the guise of protecting ‘job-creators’; conversely, when governments grant poor laborers money to work, it is condemned as buying votes and sustaining lazy welfare mothers. Through the use of political rhetoric, politicians justify the promotion of job creation as an acceptable tradeoff to forgo revenues (taxes). These are the same revenues used to fund social and economic programs which provide assistance to the under-privileged “laboring-class” of society. In essence, our current political system is designed to contribute to the underlying imbalance embedded within a capitalistic system. The fact that corporate America might be receiving favorable treatment, dare I say welfare, is anathema.

As Milton Friedman noted in the first sentence of Capitalism and Freedom, “It is widely believed that politics and economics are separate and largely unconnected; that individual freedom is a political problem and material welfare an economic problem”. At some point, the curious must question why capitalism deserves to be the predetermined derivative of free markets. Unfortunately, (as Friedman further elaborates) politics and economics are an interconnected and powerful vehicle. Although our current political system favors big business above all, it is an interesting concept to conceptualize a declaration of allegiance to free market labor amongst America’s elite policymakers. Rectifying this thought against the classical theory that equates the power of capital with labor within the same function, might provide more power to the lower classes of society. Only then, will local governments be forced to provide ‘job-creators’ with incentives other than those that solely impact the same laborers politicians claim to protect.

Should Puerto Rico Become the 51st State of the United States of America?

By: Luke Martin and Nikki-Lynn Marshall.

A major point of contention in the 2012 US election was the possibility of Puerto Rico achieving statehood. Such an action has been considered numerous times in the past few decades, but 2012 marks the first time that the referendum has proven to be successful, making such a discussion more critical than ever. However, before any legislation can be pursued the social and economic ramifications of Puerto Rico becoming the 51st state must be thoroughly examined.

In terms of the benefits of Puerto Rico’s statehood, political parties and businesses alike are envisioning the future economic benefits of a Puerto Rican state. Not only do both democrats and republicans support Puerto Rico’s statehood, but president Obama has publicly expressed his support for Puerto Rico’s statehood. In his article ‘Make Puerto Rico a state: it’s good for business’, Gregg Easterbrook argues that Puerto Rico should be the 51st state because such a move would have a positive economic impact on both the US and Puerto Rico. He points out that Puerto Rican citizens already enjoy a number of the benefits afforded to Americans, such as the ability to freely move to the US. A formal move towards statehood would allow the US to collect not only income taxes from residents, but also corporate taxes from businesses operating in Puerto Rico. From a political standpoint he also points out that such an action would extend the democratic process in the US, as Puerto Ricans would be able to vote in US elections and would contribute the same amount of electors as Oregon (7).

When examining the positive effects of Puerto Rico’s statehood, Hawaii is often used as a parallel case, credited as a success. Many argue that the example of Hawaii proves that allowing an economically weak country to become a state can benefit both the US and the state itself. Prior to its statehood in 1959, Hawaii was an economically weak country, lacking in economic growth as well as public institutions. However, in 2012, Hawaii now boasts one of the highest GDP per capita’s of the US states and has significantly contributed to the US economy through it’s image as a safe, US tourism destination. Thus, many argue that allowing Puerto Rico to become a state will reform Puerto Rico economically, as well as contribute to the overall US economy.

The negative impacts of Puerto Rico statehood however must also be considered. While a small majority voted in favor of Puerto Rico gaining statehood it was in an unbinding referendum with dubiously constructed questions. In all prior referendums in 1967, 1993 and 1998, the proud islanders voted against becoming a state. The social and economic implications may suggest statehood is not in the best interest for either the USA or Puerto Rico. Economically Puerto Rican’s median household income is half of the poorest American state. This would likely necessitate an increase in government aid and other social services. And in a slowly recovering economy, government spending needs to be frugal in order to diminish the national debt. The Puerto Ricans themselves may have personal reservations for wanting to join the USA. As it currently stands the citizens of Puerto Rico do not pay federal income taxes. Obviously as a state they would be obligated to pay taxes and thus receive less income.

The social dilemmas of Puerto Rico joining the USA are also substantial. Many Puerto Ricans fear that becoming a state would catalyze an erosion of the unique Puerto Rican culture. Their language, food, and customs would all suffer a pervasive infusion of American influence. America is known as the melting pot, and Puerto Ricans fear that their culture would vanish like the Native American tribes before them. Another concern is that just 20% of Puerto Ricans speak English fluently, thus, many wonder how Puerto Rico can assimilate when so few speak English and their culture is so unique.

The island of Puerto Rico has been in a statehood purgatory for over a century. Up until the 2012 referendum the Puerto Rican people had been content to walk the line between territory and statehood. But it seems now Puerto Rican’s yearn for official statehood. And it is our opinion that it would be in both the US and Puerto Rico’s best economic and social interests to embrace each other with open arms.

Inequality Across the Globe

By:Alyssa Dizoglio and Franziska Meinherz.

According to the article “For richer, for poorer” in The Economist, socioeconomic inequality is one of the largest growing problems of our time. Unfortunately, is not a problem that will easily go away. The inevitability of inequality is more evident than ever. Comparing the first American Gilded age to the second, it would seem that inequality had diminished instead of increased. During the first Gilded Age, the wealthiest Americans, like George Vanderbilt II, had estates that were 300 times larger than the average American dwelling. However by the second Gilded Age, the gap had narrowed, and even some of the wealthiest individuals’, like Bill Gates, homes are only a mere 30 times larger than the average modern American home. However the improved living standards of the middle and working classes masks the dramatic concentrations of wealth held by the top 1% in America, a figure that has only increased over the past 30 years; the share of national income held by the richest 1% has doubled since 1980. Furthermore, the share of income going to the top .01% has quadrupled. It is hard to look at these figures and not see the inevitability of inequality.

While the concentration of wealth at the top is certainly staggering in America and many countries across the world, this does not mean that the entire world has become more unequal in the past 30 years. In fact, global inequality has begun to fall recently as poorer countries converge (catch up) with richer ones. In the 19th and 20th century, global inequality increased as richer countries industrialized, allowing them to grow faster than poorer countries. More recently though, that pattern has shifted and global inequality has started to fall despite the fact that inequality within many countries has only risen.

When inequality first started to rise after industrialization, people weren’t all too worried about it. Simon Kuznet suggested an inverse U shaped correlation, known as Kuznet’s Curve between economic growth and inequality saying that inequality first rises with the beginning of industrialization, but that it then starts to decrease because society wants social policies to be implemented. Kuznet’s prediction seemed to hold until about the 1980’s when inequality started to rise again. Despite the rise in inequality, politicians, economists and the general society remained largely unconcerned with the issue. Only around 2001 with the dotcom bubble and subsequent recession did inequality become a top political issue perceived as potentially dangerous. Not only did fairness become an important concept, but the possibility that inequality leads to political instability became obvious. This had already been proved in earlier decades in Latin America, which had long been the most unequal continent, and which also experienced much political turmoil throughout its history.

While some societies are more concerned about the potential of increasing inequality than others, the reality is that increasing inequality is inevitable without some sort of government intervention. The article suggests that the problem can be solved by prohibiting abuse of financial resources through cronyism, which is certainly true in areas such as Latin America. However, not even in these countries would this policy be enough to keep inequality from rising further on a global scale nor would it serve to lift the poorest of society up from the rest, especially when considering that in many countries, the US included, nepotism and other forms of corruption are not the main cause of inequality. It is very unlikely that without government policies regarding income distribution the problem of inequality can be solved.

The Law and Disorder of the Financial Market

Image credit: Satoshi Kambayashi, published Oct 13th 2012 "Law and disorder: Financial institutions are vulnerable to investigation, prosecution and litigation from every direction." The Economist.
By: Wenqing Zhang and Janaki Patel.

There are many entities in the US coined to be consumer protection bureaus, many of which specialize in prosecuting financial firms. These entities are, for example, the Securities and Exchange Commission (SEC) and the Federal Deposit Insurance Corporation, but there are also other departments which create settlements with big banks. Other entities that are often unrecognized as prosecuting entities, are the Department of Housing and Development, which assisted in a $25 billion mortgage settlement with banks. The persistent problem is that the settlements that are being made are not necessarily protecting the consumer directly, and on top of that, financial firms are being exploited repeatedly.

Furthermore, since the settlement will be used to fund the government budget, the reward for being the one who take the settlement will be great. Though there are some “underground” rules among those investigation departments, for instance, DoJ always takes the case that SEC are limited to take, the coordination among the investigation departments is not secured. According to the Standard Chartered case, in which the Department of Financial Service (DFS) rapidly collected $340 million settlement from the bank unilateral. Since the rewards for being the first to fine the financial institutions is so great, the investigation departments will have a higher incentive to be the first to prosecute. This behavior will absolutely destroy the coordination between the investigation institutions and in addition, it can disorder the market.

In fact, the settlement can now be regarded as a trade between the financial firms and their investigators. Since the result of an indictment of a financial institution can be really bad, for example, the indictment may suspend its license, so firms always choose to pay the settlement when the investigation starts. Therefore, if the firms did something bad, since they paid the settlement and the investigation ends, their bad behavior will not be found. If they did not have any bad behavior, the investigation department will also leave them alone because of the settlement. According to the article, “this cosy alignment of incentives worries some.” This “alignment” cannot be regarded as justice regulation any longer, it is just a different form of trade. The law of the financial market does not stabilize the market but disorders it.

I would like to make clear that I don’t agree with completely defending big financial institutions, because often times, bankers will often bend the rules for their own personal financial gain, as we have seen in the case of trader, Kweku Adoboli, who had his bank, UBS, be fined 29.7m pounds for fraud. In this case, UBS had made some serious mistakes in not effectively utilizing controls within the bank, but in other financial settlement investigations, the crime may not have been committed by one person or one firm and just one firm may be charged. Take, for example, the LIBOR scandal which costed Barclays $450m in settlement charges; this scandal, which some evidence claims that other banks have colluded on has not yet fined other firms ( though, it may soon enough) and manipulated LIBOR rates could have affected over $800B in trades, including almost half of the derivative market and homeowner interest rates. While the practices are not justified, it seems that every banker in the industry receives a bad name for the scandal and yet, the culture does not change in the upper-level management. The real problem is that these suits are costing financial firms millions of dollars, which are not necessarily improving the system and are not creating a more fair system . In addition to that, firms can be sued repeatedly for the same crime by federal and state authorities, and the banks may pay out settlement fines, simply to get political authorities off their back, even if they are not guilty of any crime, creating an endless and vicious cycle of continuous lawsuits. It seems that the only way financial firms can cope is to hire a larger legal team - though that seems unreasonable, considering that the point of the legal system is to decrease crime and bad practices, rather than increased the population of lawyers.