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.

Taxing obesity?

By: Samantha Weinberg and Ryan Santana.
Edited by: Janaki Patel.

Many countries around the world have been trying to tackle the issue of obesity in new and creative ways. One such tactic has been to levy a tax on unhealthy foods so that they are less desirable for consumers. This was implemented in Denmark by the government so that 16 kroner (2.7USD) per kilogram of saturated fats in a product was added to costs. This led to an increase in costs for the producers of these goods and higher overall administrative costs in their attempts to adjust prices accordingly. Unfortunately, this “fat tax” did not have the desired results since it did not deter consumers from purchasing the unhealthy foods. In some cases, people actually crossed the Danish border to get their sweets from countries where it was cheaper without the tax.

The Danish government has announced plans to repeal the tax in light of its failure and has halted works on a sugar tax that was being considered. This failure calls into question what the government can actually do to encourage consumers to make healthy choices. In New York, and some other states, mandates have forced calorie information to be displayed in all restaurants so consumers can at least make more informed decisions. This method does not seem to be making much of a difference either. New York has also been one of the first states to place a ban on super-sized sodas. European countries have also tried to develop new ways to control the problem. One example is Hungary’s higher tariffs on soda and alcohol so the goods are more expensive on the local market.

With obesity becoming a growing problem in the United States and other developed countries the ability to curb this is seen as essential for governments. In light of Denmark’s failed attempt, other governments are questioning their tentative plans to implement similar programs. At some point government will need to decide how much of peoples’ decisions they can actually influence and also decide if it is worth the risk of potentially neglecting other important parts of the economy. The government will also have to ask itself whether it is realistic to control the problem of obesity. At the same time people must also take responsibility for the way they treat their body. There may be ways a government can attempt to deter the option for people to eat junk food but, like in the article stated, there are ways for people to ultimately get what they want.

The next step, as economists, is to try and think of ways that we can influence people's choices without interfering with the direct interaction between consumers and producers in a negative way that leaves all parties worse off. Although education on nutrition is better than ever before we could probably look into putting more energy and resources in the education of nutrition rather than possibly hurting the market. Educating kids on nutrition at schools and raising awareness about junk food can be a better solution. And while we’re at it we should also inform people about the dangers of non-organic and processed foods. If people know exactly what they are eating then people can make much more informed choices as compared to simply looking at a calorie count on a menu.

American Misconception on Immigration

By: Adrian Nardella and Fiona Maguire.
Edited by: Luay Kanaan.

From Italians and Slavs in the early 1900’s to Central and South Americans in the late 90’s early 2000’s, the concept of immigration in the U.S. has managed to maintain its political prominence due its substantial impact on economic strength, native employment rates and wages.

For some, immigration is seen as a growing concern to the nation; however, the article “Immigration and American Jobs,” written by Eduardo Porter of The New York Times proves this stigma untrue. Immigrants, generally, are employed for manual labor in-part due to their inability to obtain the qualifications and skills held by native employees – thus leaving more specialized and verbal jobs such as being a clerk Americans. These manual labor positions often pay lower salaries, but they act to “reduce the prices of some products and services by providing employers with a new labor source and creating more opportunities for investment and jobs.” Also, because the undesirable jobs such as being a dishwasher or landscape contractor are being performed by immigrants, higher paid positions are created for qualified natives to fill.

However, immigrants influencing the cheap labor market have been under intense media/government and political scrutiny, especially during the Presidential race, because during economic hardships like the 2008 recession immigrants are seen to “steal” American’s jobs because they work for cheaper wages. Not understanding the positive effects immigration and cheap labor have on the long-term stability of the U.S. economy makes it easy for “proud” Americans to be misunderstood as xenophobic Americans.

This article, “Immigration and American jobs” relates back to what we have learned in class, regarding the topics of immigration and income inequality. In class, we discussed how when immigrants first begin to work in their new country, they earn a 17 percent lower wage than natives do. Then, within 15 years of coming to the new country, the immigrant’s wages overtake the natives and within 30 years of arriving to the country, these immigrants begin to earn around 11 percent more than the natives are, therefore stealing American jobs and money. However, this article explains that this is not the case of the poor immigrants that are coming from Latin America. Thus, these immigrants are either creating jobs for Americans or taking jobs that Americans are not willing to take such as the dishwasher at a restaurant.

These Latin American immigrants are not earning more than Americans are, as seen in the graph on a sign used for Occupy Boston portraying the average household income from 1979 to 2007. This graph shows how immigrants that are in the bottom 20 percent of the population in terms of income, tend to remain at the very bottom of the graph without any increases.

This article on immigration and its effects on American jobs explain how immigration can be seen from a different perspective. As Americans, we tend to think that immigrants are taking our jobs due to their willingness to work for low wages. However, immigrants are helping Americans create domestic jobs and at the very least accept the jobs that Americans do not want.

Inequality and Future Growth (or lack thereof)

By: Jonathan Burns and Kyle Peabody.
Edited by: Nick Tourville.

Income inequality has been growing in America for decades now. For years, it was something people were aware of, but beyond the fact that “the rich are getting richer,” not much was known about the phenomenon. Now, new evidence is emerging that the level of inequality in the United States has reached a point where it could begin to hinder future growth (if it hasn’t already).

According to the International Monetary Fund, job creation and economic growth could be slowed by as much as a third due to the growing inequality in the United States. For years, many saw the growing inequality as a result of preferential tax treatment to income vehicles that “the rich” frequently benefit from, such as investments. Now that research suggests that the inequality that we have amassed could stunt growth, organizations such as the International Monetary Fund and Organization for Economic Cooperation and Development are lobbying for both changes to tax structure and spending programs to reverse the disparity of income.

Large differences in income can have many problems for nations, such as political unrest – be it violent uprisings in the Middle East or movements such as the Tea Party or Occupy Wall Street in the United States. Most economists – and both Presidential candidates Mitt Romney and Barack Obama – agree that a strong middle class is an important part of a healthy economy and drives economic growth. At the same time, most recognize that the growing inequality is coming mainly at the expense of the middle class. Without corrective policy measures, such as more fairness in the tax and spending code including reductions in loopholes and subsidies, there is likely to be slower job and economic growth in the United States, which coupled with the inequality itself, could spill over into social issues as well.

Indeed, while much of recent literature on the issue of income inequality has been negative, one must not forget that there is another side to the coin. Some economists have maintained that this inequality is not necessarily as bad as it seems. First, some analysts have questioned the actual data used. They argue that it omits in-kind benefits, nonsalary benefits, and taxes, which are disproportionately borne by higher-income families. Thus, they argue that the data is skewed and shows more inequality than there is actually is. Second, there is the argument that while acknowledging the growing inequality, the large increases at the top will benefit the rest of society as a whole. These benefits would include improved living conditions, technology development, and overall growth of the economy. Essentially, while the poor would remain poor, their lives would be better off than they were before. In reference to these rapidly growing incomes of the top 1% and the stationary incomes of the 99%, some appeal to the saying “a rising tide lifts all boats”. However, as described earlier, new research suggests this inequality has the potential to stunt growth, if it hasn’t already. With this stunted growth, there would not be any “rising tide to lift all the boats”. Rather, with the “tide” unchanged (or perhaps even lower), a small portion of boats would just become much bigger boats.

Lowrey, Annie. "Income Inequality May Take Toll on Growth." New York Times: October 16, 2012.
Harbin, Christine. "Income Inequality is Not a Problem: The Free Market is Making All Americans Richer (Debate)." PolicyMic.

Immigration and American Jobs

By: Jeff Taylor and Paulius Kosmarciukas.
Edited by: Jacob Beck.

This, “Immigration and American Jobs” by Eduardo Porter, article sheds new light on the issue of immigration to America, focusing on those who enter the US illegally from Mexico and South America. The prevailing argument for tougher border security and immigration control is the notion that these unskilled laborers come to the US to displace American workers because the immigrants are willing to work for less money. Mr. Porter posits that these unskilled laborers do not directly compete with the American laborers because unskilled labor jobs are not being taken away from anyone.

However, a number of Americans believe that incoming immigrants, in fact, do take jobs away from currently employed Americans, forcing native workers into unemployment. Not only do immigrants take the jobs away from Americans, but they also put undue strain on the social institutions by “free riding” in the healthcare system and avoid paying taxes. For example, sick or injured illegal immigrants go to the emergency room when hurt and cannot be denied treatment even if they do not have health insurance. Due to this, the tax-paying citizens end up picking up the unpaid hospital tab. In addition, immigrant families also strain the municipalities in which they live by overloading the school buses and classrooms with students whose families do not always pay property taxes.

While some of these points are quite valid, the effect of immigration on the US economy is overall positive. The article points out that it is quite a rare case that an immigrant worker directly displaces an American worker. As a result of this transition of jobs, the American workers must continue to better themselves by acquiring new skills or knowledge. This is part of a global, competitive market economy. From the employer’s perspective, cheap labor saves money by lowering operating costs for the entire business. Thus, the extra savings can be spent on investments in the growth of company, creating more skilled jobs for American workers. By displacing the American workers from the unskilled position, it forces them to learn and innovate, which promotes a healthier economic environment, and creates more skilled, educated American workers in upper-level management type positions. In the end, the immigrants end up contributing more to the long-term value of the United States economy than taking away value from the economy in the short term.

America is a country founded and built by immigrants. It must be remembered that immigration is the driving force behind the renewal process that defines America. Part of economic growth is replacing old job titles with new job titles. The upward trajectory of the American worker is in part driven by the fact that there are fewer unskilled jobs available. The American dream, the idea that anyone has an opportunity to better oneself and move up in society, is deeply rooted in this as well.

Instead of wasting federal and state budgets on border patrols and building higher fences to keep the illegal immigrants out of the country, that money should be spent on finding ways to make legal immigration more simple. By providing pathways to legal status, illegal immigration should decrease. In addition, these pathways will allow newly naturalized citizens to participate in the American society as many native born citizens already do, by paying taxes for their use of schools and healthcare.

What’s the Issue with American Schools?

By: Ryan Santana and Benjamin Virkus.

It comes as no surprise that American educational institutions are ranked poorly amongst the American public. Education reforms from the past decade have all fallen short of their goals: Quality schools are still not accessible and affordable, and America is still falling behind in the education department. There have been attempts made by the Obama administration, such as Race to the Top, to help the faltering states and schools; There have been promises made by Mitt Romney, such as slashing the federal education budget and using a voucher system, to help states and schools. Although it is unclear whether or not any policy has the ability to turn around American schools, what is clear is that America needs to revamp its educational system, and fast.

Obama’s Race to the Top has made education a competition. While the intentions of the policy are good, the results are far from that. Poor schools and states made up of largely poor school districts have found it hard to compete for the extra federal funding. Teachers have found an increased incentive to falsify test scores, and essentially cheat for their students. Another supposed remedy for education is charter schools. Charters schools are good in theory, but they fail to serve the larger needs of the community. Students who attend charter schools only perform marginally, if at all, better than their public school counterparts. Federal intervention and funding seems to be key to providing students from all walks of life equal educational opportunities.

What about Romney’s proposed plan? Romney would like to cut federal intervention to schools and provide vouchers to parents. A couple of states already have voucher programs and those states do not outperform or provide an above average education. Vouchers would only cover a fraction of what needs to be done. But why should the Government not be involved in education? Without Government intervention, schools might still be segregated. Government funding, while good natured, might not be the best option. Still, the extra funding might be able to keep impoverished school districts at the same level as their better-funded counterparts. Cutting the education budget and funneling funds elsewhere is definitely not the answer.

American schools are falling behind their international counterparts. America used to be home to some of the world’s most progressive institutions of learning, but now school is either too expensive or offers subpar education. Education is in need of massive reform and policy makers have yet to find a solution. No matter which side wins this election, Obama or Romney need to put pressure on states and schools to start providing for their citizens. America can lead again, we just need a push in the right direction.