The European Union that never was

The European Union that never was

On June the 23rd of this year, the British people voted to leave the European Union (EU), with 52% opting to leave. This decision blindsided most political pundits and went against the advice of both the then-Prime Minister, David Cameron, and the opposition Labour leader, Jeremy Corbyn, with the former resigning soon after the result.

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Source: The Electoral Commission – UK

Many prominent individuals who traditionally assume guard on the same flank of the political and economic battlefield found themselves opposed in this ballot. No longer could individuals count on their side of politics to guide their pen, as many on the left countenanced leave and many on the right countenanced remain, and vice-versa. All rather confusing.

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Leave supporters: Steve Keen (left) and Boris Johnson (right)
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Top: Yanis Varoufakis, Remain; Bottom: Tariq Ali, Leave
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Remain supporters: David Cameron (left) and Jeremy Corbyn (right)

These leaders, from differing backgrounds and professions, took up contrasting positions, each with different justifications and constituents they were seeking to represent.

Firstly, Steve Keen is a Post-Keynesian economist (a school of economics outside the mainstream) and is currently the Head of the School of Economics, History and Politics at Kingston University in London. Keen was prominent in his criticisms of the European Union’s bureaucracy and undemocratic nature, using the Greek debt crisis as an example of the power of the European Central Bank (ECB), the European Commission (EC) and the International Monetary Fund (IMF) – together, the Troika –  to remove power from democratically elected, national governments and return it to Brussels. Not only this, returning power to a bureaucracy attempting to enforce an economic dogma he described as “a suicide pact” – the Maastricht Treaty.

The Maastricht Treaty set strict limits on public debt levels and how national budgets are utilized. The treaty limits government deficits to 3% of national income and public debt levels of 60% of national income. These standards were set in a way that was meant to ensure stability and ensure that convergence of the member nations was achieved to facilitate the single currency. Effectively, they restricted how national governments should operate their national budgets. Signed in 1997, this graph displays the public debt to GDP ratios of several member nations in that year and the year after.

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Source: European Commission, Statistical Appendix to European Economy

As can be seen, many of the member nations were above this public debt limit. To attempt to bend these rules, the European Commission allowed members to enter if their debt levels were falling year on year. Even with this allowance, in this graph Austria is shown to be disqualified. Germany, the largest member, went from 59% public debt to GDP in 1997 to 60% public debt to GDP in 1998, which should have disqualified the economic champion of the union. Simultaneously, the second largest member increased its public debt to GDP from 59.3% to 59.6%. Both have resided above the 60% limit since 2003.

More crucially, the rules specified that the European Central Bank cannot print Euros to assist members who have fallen into debt crises like those experienced during 2010. Economists like Keen and Varoufakis rail against this rule and its implications in particular. This meant that a nation like Greece, facing a serious debt crises, could neither use large deficit spending to kick start the economy nor rely on a central bank to use quantitative easing or other measures to restart credit creation and lending from the financial sector to spur investment, forcing Greece into a deleveraging death spiral.

In 1992, economist Wynne Godley, wrote an eerily prescient article in regards to the Maastricht treaty and the Union, asking the question:

“What happens if a whole country – a potential ‘region’ in a fully integrated community – suffers a structural setback?”

A question that unfortunately remained unanswered until that crisis was upon the Union. Keen continues to refer to Godley’s article in his critiques.

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Economist Wynne Godley

Keen’s use of the Greek example is a pertinent one. In the Greek election of January, 2015, the outcome was a coalition government made up of the radical-left party Syriza and the populist right party Independent Greeks, united solely by opposition to the bailout being offered by the IMF and the EU. Alexis Tsipras, of Syriza, was sworn in as Prime Minister later that month, representing a major coup for the anti-austerity movement sweeping the continent. Despite this outcome, by August of that year, the left-wing Prime Minister had signed a third bailout deal with the Troika, forcing higher taxes and further spending cuts to satisfy the creditors. Not only did this go against Tsipras’ original mandate, but it flew in the face of the referendum result just days earlier, with 61% of the Greek people voting to extend the government’s mandate to not accept the bailout conditions. A national vote of its citizens had been overcome by a monetary union looking to preserve its credibility by saving Greek creditors – largely German and French banks. This exercise of power over a nation state for supranational interests is exactly what Margaret Thatcher warned of. In 2016, a ‘reclaiming of sovereignty’ was a key argument of Brexiteers in the referendum.

Yanis Varoufakis had a front row seat to Greece’s political theatre of knives. Made Finance Minister in Syriza’s election victory of January 2015, Varoufakis was the elected official tasked with representing the will of the people. A professor of economics himself, and writer of several books on game theory, it would seem the Greeks chose well. First and foremost, this task involved negotiating with the Troika for terms of an agreement that would include substantial debt relief to the Greek people. Recently, Varoufakis has stated in his blog:

“…I had ranked the potential outcomes in the following order: (1) a viable agreement with the Troika; (2) being expelled from the Eurozone; (3) signing the 3rd ‘Bailout’ agreement.”

After hitting a brick wall in negotiations with creditors compelled to hold-fast by the wish to impose similar austerity measures on other countries further down the line (Portugal, Spain and, Varoufakis argues, eventually France), using Greece as an example, Varoufakis began planning a parallel payment system so that the Greeks could unilaterally exit the Euro in the face of unacceptable bailout terms. Despite the bailout referendum outcome, which should have reinvigorated and emboldened Syriza’s leadership to carry on in its push against the creditors, Tsipras caved to the Troika demands soon after the result and signed documents establishing fiscal targets that meant further tax increases and spending cuts, leaving Varoufakis no choice but to resign from his posting as Finance Minister.

The Greek example would seemingly be enough for any man to be put off European unity. However, Varoufakis still argued that Britain should remain in the European Union. He argued for a strategy of ‘remain and reform’, suggesting that a break from the European Union would not be a successful break from the neoliberal agenda underpinning the Union’s key institutions, as deflationary forces would lead to a rise of the right, leading to further recourse to austerity, not less. The Greek experience, as explained by Varoufakis, paints a picture of a dictatorial, supranational power suppressing the calls of national citizens – an image that Brexiteers portrayed as a betrayal of the nation. However, with extremely different reasoning, Yanis Varoufakis found himself an odd bedfellow of David Cameron, as he too shouted to Remain.

Comparatively, David Cameron argued that economic catastrophe would unfold if Leave succeeded. In his final speech before the vote, Cameron focused on the ability of European nations to coordinate to ensure national security when part of the Union, the impending recession that would occur if an exit occurred and the access to the Single Market of Europe. Cameron argued that Britain had “the best of both worlds”, by not having the euro currency but having the regulatory standards and market access. Thus far, the economic impact has been mixed.

Cameron does mention a crucial difference between the Greek and British experience with the European Union – the Greek’s have adopted the Euro and thus given control of their monetary policy to the European Central Bank, whereas Britain negotiated early on to be part of the Single Market but not adopt the currency. Leaders of Britain were openly apprehensive about the Union from its outset, with Margaret Thatcher particularly critical of its potential, and implicit need, to reduce the power of the House of Commons.

As a result, the United Kingdom maintained an arms length relationship with the European Union in terms of monetary control. However, Full Fact (a UK based independent non-profit fact checking agency) found that 15-50% of the laws passed by the House of Commons are adaptations or adoptions of European Parliament law, highlighting the difficulty of measuring influence in legislative impact.

Under current Prime Minister Theresa May, it is becoming increasingly likely that a so-called ‘hard Brexit’ will take place – British exit from the Single Market. Article 50, from the EU agreement the Treaty of Lisbon, outlines the method in which a member state can exit the Union. Theresa May recently made comments indicating that she wants a ‘clean break’, which have been interpreted to mean that the Conservatives do not wish to negotiate a deal that requires continued contributions to the EU budget and continued observance of certain EU regulation, in exchange for continued access to the Single Market; Norway uses these policy settings. However, conservatives and those on the right who pushed Brexit as a way to curb immigration are apprehensive about this suggestion, as access to the Single Market demands free flow of labour across borders. This specific feature of EU membership was used by Nigel Farage and other Brexit campaigners to argue the Union did not benefit average, working-class Britons.

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Current Prime Minister Theresa May

Many believe May will adopt a position that appeases hard-line Brexiteers, like Farage and those inside her party like Boris Johnson – a position that will result in loss of access to the Single Market in exchange for full control over the national budget, immigration and regulation. Most experts predict a far greater impact if this is the outcome of the maximum two-year negotiations.

Simultaneously, Labour has completed its leadership elections, with Jeremy Corbyn reaffirmed as Labour leader. Corbyn, like Varoufakis (who campaigned for his election to the leadership in 2015) and Keen, has criticized what he terms the “free market dogma” of the EU. He has indicated since his re-election that a ‘hard Brexit’ must be avoided and that negotiations must ensure that Britain holds on to access to the Single Market whilst recovering its sovereignty and respecting the meaning of the referendum result. Corbyn has challenged May and the Conservative Party on its handling of Brexit, stating that some in her party wish to turn Britain in to a “tax haven, offshore island off Europe.” Corbyn’s primary concern remains ensuring that wages are not undercut by foreign labour, a problem he says can be addressed without restricting the movement of labour.

Britain now faces the issue of trying to negotiate a deal with an increasingly cornered European Union administration attempting to maintain its perceived attractiveness whilst addressing the exit of a major European nation. Germany, as the dominant player of the EU and whom Varoufakis refers to as ‘the European hegemon’, will rail against any cherry-picking of the regulations and Single Market pillars. The challenge remains for British leadership to deliver on a multitude of somewhat incompatible promises whilst negotiating with a former partner that it never truly embraced. The way that EU leadership responds will be crucial to the outcome of negotiations. If it chooses to use Britain as an example, as it did Greece during the debt crisis, May and the Conservative leadership will have to accept compromises. It seems unlikely EU leadership will suddenly be overcome with compassion for the British, giving them a sweetheart deal. As a result it seems unavoidable that by respecting the referendum result, Britain will suffer either some economic cost through reduced investment and reduced trade, or accept the free flow of labour across its borders, a tough sell to the rising Right of the nation.

In explaining the EU, Varoufakis said to the BBC in 2015:

“The problem is that once you’re in, it goes just like the Eagle’s song ‘Hotel California’ – you can check out any time you like, but you can never leave.”

Indeed, for Britain, they are trying to leave a club which does not permit exit – a cult like group complete with religious doctrines. During the escape from these zealots, Britain will bear some cost – it remains to be seen which priorities its leaders deem more important, or more politically palatable.

 

 

 

 

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Should robots be a graduate’s greatest fear?

Should robots be a graduate’s greatest fear?

Most recent graduates will know the struggle of the application process involved in trying to secure that first job. Email after email after email. Hoop after hoop after hoop. The process itself is enough to put a graduate on the back foot in the labour market. However, should graduates be more concerned with the potential for automation and computerization of the jobs they are hoping to secure? Is there really a robot right around the corner looking to deny you employment in your graduate area and what should you do about it if that’s the case?

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The future of the smoko?

This issue has gained traction in popular media outlets recently, with many organisations attempting to evaluate the potential job losses and the industries most likely to be affected by automation. Many studies have already been done in the United States and Europe, with wildly varying results. The best method with which to measure the effects of automation is still disputed. Many studies have measured in terms of the ability to automate entire occupations.

For example, a study done by Carl Benedikt Frey and Michael A. Osborne of Oxford University in 2013 concluded that 47% of US employment were at risk of being automated. This result was astonishing – nearly half of US total employment was classed as a high risk of being automated in the “next decade or two”. They also note a strong negative correlation between wage growth and skill development and industrial automation.

A study by Deloitte in 2015 on the Swiss job market found that nearly half of the current jobs in the market faced obsolescence through automation. Of particular relevance to university graduates was the fact the authors estimated a 95% probability that accountancy would be automated, along with a 40% chance that financial advice would be automated. Comparatively, lawyers, doctors, psychologists, architects and civil engineers faced only a 1-3% probability.

In stark contrast to these similar results are the ones of an Organisation of Economic Cooperation and Development (OECD) working paper published this year. The paper begins by criticising the occupational approach of previous studies like Frey and Osborne’s, which assume that whole occupations will be automated rather than specific tasks within an occupation. They argue this will lead a significant overestimation in models. Using a task-based approach to compare to the occupation-based approach, the authors find a much lower 9% of jobs on average are under threat of automation across the 21 OECD countries. There is some variance across countries, which can be seen in this graph below.

Of particular interest is the difference in estimates for particular occupations. In Frey and Osborne, a retail salesperson faced a 92% chance of automation, but the OECD paper only finds 4% of retail salespeople do not use face to face interactions or group work in their jobs – tasks the authors logically note as difficult to automate. For accountants, the 98% figure falls to 24% when considering these task requirements.

There is also significant variance between countries, with the Slovak Republic facing a far worse situation (45% of workers in jobs at high and medium risk of automation) versus Korea (only 25% of workers in these bands).

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Source: Arntz, M. T. Gregory and U. Zierahn, OECD Working Paper (2016)

The level and qualitative impact of automation remains controversial. However, there are some key facts that are agreed upon in the body of research to date. Jobs requiring social skills, creativity and group work are far less likely to be computerized. The skills which remain difficult to automate with today’s technology also align, broadly, with the ones being earmarked as desirable by firms looking for graduates in Australia.

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Source: Graduate Outlook Report 2013

Both Frey and Osborne and the OECD working paper find that low wage workers are those to be most affected by automation. Frey and Osborne pointed out that automation of the twentieth century hollowed out middle class jobs with the great factory production lines of the United States and elsewhere being replaced with machines, resulting in a surge of employment in to higher and lower wage jobs. Comparatively, both papers suggest that this will shift to target predominantly low-skill, low wage jobs, and as a result, these workers will bear the brunt of the adjustment costs associated with these changes. This is a potentially problematic situation given the state of advanced economies today; many already face significant government debt, limiting their ability to invest in retraining and education for workers displaced and many are already feeling the political and societal impact of current levels of inequality (see my previous post).

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Source: Frey and Osborne 2013

The graphs seen above highlight that in Frey and Osborne’s modelling, jobs with lower average median wage face a far greater probability of automation and those with a lower proportion of bachelor degree’s or higher face a greater probability of automation. This all seems to point to the need to push more of the labour force in to universities. According to the OECD, in 2010 nearly 45% of Australians aged between 25 to 34 had attained tertiary education. This is a common trend across the developed world, now being referred to as the ‘massification’ of higher education. Partly as a result of this, today graduates face a long wait for employment and an ever increasing proportion seek further education to secure future employment or take jobs outside their field of study. In 2015, Graduate Careers Australia found in their annual GradStats report that one fifth of their respondents had elected to return to full time study after finishing their bachelor’s degree. 1 out of 10 of those with a Bachelor’s degree and available for full time work reported that they were unemployed and still looking for work.

Some reports give even more dire predictions. A report published in 2015 by the Foundation for Young Australians found that for the average Australian it will take five years to secure full time employment after study, albeit this used data across school, vocational and university study respondents. In 1986, the average time to secure employment after study was just one year.

As a result, developed nations seem to face incompatible macroeconomic pressures. The labour force in recent decades has achieved a high standard of education, driven by need, societal expectation and through the effects of past automation. Despite this, the pressure to increase the height of this already high bar remains significant. Problematically, graduates already face record waits to secure employment in their relevant fields, with a weak job market, hugely qualified workforce and international competition for places all contributing to this wait. In this country, we have some of the most qualified customer service representative and bar staff of any nation in the world.

This conundrum seems to be one that is out of control of an individual graduate largely, other than potentially taking note of the fields which require higher education but are also earmarked to be affected by automation, potentially factoring this in to their choice of degree. However, for this issue to be addressed broadly, government and the private sector must find solutions.

Some academics, like the authors of the aforementioned OECD working paper, suggest that technology will not breed less jobs, but more. By driving productivity and allowing better utilization of current resources, business can reinvest these profits and thus generate more jobs, leading to a growth in opportunities. The phrase “we always create new jobs” is not uncommon to hear in debates around this issue – this seems to be an easy way to suggest an economic mantra of belief in the market. Even progressive proponents like tech entrepreneur Nick Hanauer suggests that we do not need to panic about job creation, as humans have always found work to do, citing the industrial revolution and the birth of computers as times that we have adjusted and created new jobs to fill the void.

However, others are not so optimistic. Scott Santens, a writer and journalist, has been a key proponent of a universal basic income, suggesting that it is all-at-once the solution to the problems of inequality and the threat of automation. The Basic Income Earth Network (BIEN) states that a basic income is “an income unconditionally granted to all on an individual basis, without means test or work   Santens argues that automation has led to the creation of many ‘bullshit jobs’. These jobs he characterizes as very acute in their specialty nature, with little room to acquire new skills and little room for employee development. He questions the need for these jobs altogether, suggesting that if these are the jobs that we are creating in the place of already low-skilled jobs in the future, should we not to turn to a system which ensures basic living standards?

Prominent economists like John Kenneth Galbraith, Milton Friedman, James Tobin, James Buchanan, James Meade, Robert Solow, Paul Samuelson and F. A. Hayek have all supported the idea of a basic income in some form. Widely read philosophers like Bertrand Russell and Henry George have also written of their support for the idea in previous centuries. Various US political leaders of different times have given their voice in support of the idea, including Franklin Delano Roosevelt,  Martin Luther King Jr., Lyndon B. Johnson, Richard Nixon and Jimmy Carter. More recently, Switzerland voted down the idea, 75% voting no and 25% voting yes. The current, though under-siege, opposition leader Jeremy Corbyn has suggested he will investigate and consider the proposal of a basic income if elected British Prime Minister – however, this remains seemingly unlikely at the moment. In the United States, Bernie Sanders expressed sympathy to the cause as well.

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Galbraith (left), a structuralist economist, and Friedman (right), a monetary economist, both supported different types of basic income guarantees

This is not the only solution being put forward, with the idea of a federal job guarantee being supported by modern monetary theorists (MMT) such as Bard College economist and professor Pavlina Tcherneva and Australian economist and Newcastle University professor Bill Mitchell. Effectively, this social program would mean the government acts as an employer of last resort, ensuring that in times of poor economic growth those who become unemployed do not remain so. In this way, full employment is achieved and spending on welfare benefits is reduced by putting those unemployed in to government jobs. Another MMT economist, L. Randall Wray, argues that this program would cost 1 – 2 percent of gross domestic product in the United States. Interestingly, Tcherneva is critical of the basic income as threatening to the value of the currency and macro stability, whilst being a covert way for conservatives to remove the currently established social safety net. Wray and Tcherneva compare the two policy options in a 2005 paper published in the Rutgers Journal of Law & Urban Policy, concluding that a combination of the two policies would be best, utilizing a job guarantee and a guaranteed basic income for the young, aged and disabled.

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Pavlina Tcherneva (left) and L. Randall Wray (right)

Both of these programs require significant federal funding, something which governments lack the political will to institute and, as many mainstream economists argue, simply cannot afford (of course, MMT economists reject this argument). However, experiments are being carried out in the private, not-for-profit sector with basic income guarantees funded through donations and crowd funding. One such organization is GiveDirectly. They provide a direct cash transfer to poor communities in Kenya and other African nations, researching the societal and economic impacts of the guaranteed income using a set that do not receive the payment to compare to those who do not. Early reports of results are promising, showing an effective investment of the transfer and a significant increase in consumption as well as production in the populations given the transfer. Other experiments are being run in many countries by government, particularly in Scandinavia where the major Utrecht basic income experiment will begin soon. Despite this private and public endeavour, it seems implementing either of these strategies at a federal government level remains a distant dream in the major developed nations even in the most progressive of nations. However, Argentina has rolled out a version of the jobs guarantee, with mixed results. The Bolsa Familia in Brazil is nearly 13 years old, which gives small cash transfers to poor families – in ten years the program was credited with helping to halve the country’s extreme poverty. The country’s Gini coefficient – the widely used measure of income inequality – also improved in that time. Bolsa Familia was serving one quarter of the population by 2013.

Graduates should be aware of computerization and automation. For the broader labour market, low-skilled and low-wage workers should be acutely aware. The utilization of robots in our production processes is not a new phenomenon, and estimates of the effect are wide ranging – from dystopian to utopian. However, it remains clear that the majority of jobs requiring social interaction and group work seem safe bets for graduates, as artificial intelligence as a technology to be utilized for automation is still some time away. Although in future decades, developments in this area may change the face of automation. Radical solutions available to government include the basic income guarantee and jobs guarantee, which proponents argue address the potential loss of jobs and increase in wealth and income inequality. Neither, however, have the necessary political support to gain legislative approval in the developed world at this time. Awareness, not fear, seems the graduate’s best choice, as well as being prepared to wait to find full time employment whilst economists and governments agree on how to address this growing issue.

 

 

References

 

 

Political extremes and the new power play

Political extremes and the new power play

In 2016, we are facing reevaluations of the status quo. This realignment of the conventional wisdom began in 2007, with the mother of all credit crunches – the Global Financial Crisis. The global order governing our political, economic and societal structures are being called in to question as disenfranchisement and dissatisfaction reign supreme, pushing people to look elsewhere for answers. This trend is all-encompassing, permeating across cultural, religious and national bounds.

Here on the giant island, of usual centrist dominion, we have not been unaffected. Often viewed as an Australian aberration, Pauline Hanson is merely a symptom of the broader affliction. Donald Trump, Marine Le Pen and Robert Duterte continue to dominate our news cycles as they drive their authoritarian agendas. The far-right’s list of successes in recent years is impressive:

  • Norbert Hofer, the presidential candidate of the Freedom Party in Austria, narrowly lost to the Greens candidate in the race, by less than 1%. Since then, that decision has been successfully challenged, and a re-vote will be held in October. He leads in the polls.
  • Donald Trump, proving the pundits wrong, continues to challenge a seemingly vulnerable Hillary Rodham Clinton in the United States. Astonishingly, Clinton only holds an average 2.7% lead over Trump in the polls. The most recent CNN/ORC poll actually showed Trump ahead by 1%.
  • Current French presidential polling shows Marine Le Pen, the leader of The Front National party, polling well ahead of incumbent Francois Hollande. According to the polling, Le Pen would be in a tight race with the former President Nicolas Sarkozy or Alain Juppe, both likely-runners for the Republican Party nomination – both are being pulled to the right themselves. First-round elections will be held in mid-2017.
  • In May, Robert Duterte secured the presidency of the Philippines, sweeping away the candidates before him by capturing more than 40% of the vote. Since then, Duterte has implemented his hard-line policies on crime to devastating effect. Most recently, Duterte made headlines for referring to Barack Obama as “the son of a whore”.
  • Under the leadership of Nigel Farage, head of the United Kingdom Independence Party (UKIP), and the Conservative Party’s Boris Johnson, Britain voted to leave the European Union, with 51.9% of the vote. This was despite the best efforts of its then Conservative Prime-Minister David Cameron and Labour leader Jeremy Corbyn (arguably).

This is by no means an exhaustive list. Concurrently, Latin American leadership of normally left-leaning states comes under strain from right-wing populists, with the Workers Party’s Brazilian President impeached recently. Norway, so often held up as one of the most progressive nations on earth, has begun constructing a 4 metre high wall along its Arctic border with Russia.

It’s not inconceivable that by mid-2017, the United States, France, Austria and many other nations could have far-right heads of state. This turn of events was precipitated by an immigrant crisis and economic stagnation, as we struggle to recover from the Global Financial Crisis.

Robert Reich, Professor of Public Policy at the University of California, Berkeley, argues that income inequality is the major driver of dissatisfaction and the rise of right-wing populism in the United States. Reich, a Sanders backer turned Clinton supporter, derides what he terms excessive monopolization and the stagnation of wage growth in the United States since 1970.

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Source: Pew Research Center, 2014

As Sanders did during his campaign, Reich consistently refers back to the apparent fact presented in the above graph: hourly wages for the average American worker have risen by a mere 7.77% in real terms (2014 dollars) since 1964. According to the Organisation of Economic Cooperation and Development (OECD), in 2012 the US also had the highest rate of incidence of ‘low pay’ – those earning less than 2/3 of the median wage – out of any OECD member, with 25% of the workforce. The vast number of working poor in the developing world are so numerous that a new term has been coined in their ‘honour’ – the precariat, referring to their precarious economic circumstances. This is all while the well-documented gap between CEO and average worker compensation widens, with a Glassdoor report from 2015 finding the average ratio was 204 to 1 in the United States (Walmart’s CEO earns 1,133 times its average worker’s compensation).

Coupled with this severe inequality, is the deep sense of dissatisfaction with the political powers at be in the United States. Pew Research found that in January 2016, 70% of respondents declared they were dissatisfied with “the way things are going in the country today”. Similarly, in September of 2015 they found that 69% of people were dissatisfied with the performance of Congress. Observed simultaneously, these facts may have helped pundits better predict that two outsiders in Sanders and Trump would perform so strongly against more established and well-known candidates.

The platform of candidates like Trump have similar threads of nationalism, anti-Islamic sentiment and a rejection of free-trade. Trump has targeted Muslim immigration, the building of a Mexican border wall, free-trade agreements and second amendment rights as the key pillars of his program. Trump continues to reiterate the need to “put America first”. Similarly, Marine Le Pen emphasizes the need to support “French exceptionalism” and pushes restrictions on immigration not dissimilar to Trump’s. Furthermore, Le Pen wishes to follow in Britain’s footsteps and exit the Euro. Nigel Farage’s UKIP (which he has now resigned as leader of), claims that the British Labour party “…betrayed working people…” by creating an “open door immigration policy”. UKIP’s primary promise to its voters is to curb this “mass immigration”.

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Nigel Farage: “I think we’ve reached a point where we have to admit to ourselves, in Britain and France and much of the rest of Europe, that mass immigration and multicultural division has for now been a failure.” (November, 2015)
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Marine Le Pen after the Paris attacks: “France and the French are no longer safe.” (November, 2015)
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Donald Trump on Muslims: “They’re not coming to this country if I’m president. And if Obama has brought some to this country, they’re going, they’re gone.” (December, 2015)

These three leaders have successfully tapped in to anti-establishment sentiment, as large swathes of the electorate blame the respective centre-left or centre-right political parties for their woes. Alternatively, and simultaneously, they have attempted to pander to fear generated through terrorism, promising safer societies through immigration restrictions, with particular focus on Muslim immigration (to differing degrees). The politics of fear has played a significant role in all of their successes.

However, it would be constructive to analyse how our current systems are failing to create inclusive economies and societies. Without these failures, these leaders would lack the fertile ground from which to garner support. In another blog post perhaps.

Source: Economist.com. (2016)

The charts above demonstrate the trend effectively. Europe has been the epicentre of the immigration crisis, with Germany alone accepting a million immigrants in a single year. In response to this, and the huge economic upheaval since 2007 and the proceeding Greek, Spanish and Portuguese debt crises, nationalist parties have been reinvigorated. A strong anti-EU sense has flooded the region, even outside Britain which has always had an arms-length association with the Union, with prominent individuals like Yanis Varoufakis, Noam Chomsky and Steve Keen outwardly critical of its undemocratic bureaucracy. Recently, proponents of EU reform have started the DiEM25 group, aimed at restoring democracy to the European Union.

Clearly, these subjects cannot be unfurled in a 1000 word blog post. Complex issues of income inequality, social upheaval due to immigration, Islamophobia and economic disenfranchisement in our current systems are fields of study in their own right. However, it is obvious that common threads of nationalism, fear created by terrorism, economic stagnation and dissatisfaction with government responses to crises are driving their successes. Sanctuaries of the left are losing their strangleholds in Latin America, Scandinavia and even the bastion of progressive society, France. Critical elections are around the corner, with the most important being the US election. An endorsement of Clinton is the strongest endorsement of the establishment in recent memory. This may colour and impact later contests in strong and unexpected ways. Watch this space.

 

 

 

 

 

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Climate policy; is it hopeless?

Climate policy; is it hopeless?

In 2007, the newly-minted Prime Minister Kevin Rudd made the famous claim “climate change is the great moral challenge of our generation.” In more recent times, to much fanfare, Pope Francis released his Encyclical on the Environment, further pulling one of the most powerful, socially-conservative organisations in line with the progressive push for action. Indeed, as influential leaders from all reaches of the globe and perspectives join the chorus, are we destined to sing our way off the environmental cliff or will we face the music and change our tone to one of action?

In December 2015, the latest iteration of an international agreement to reduce emissions was agreed upon by 195 countries – the Paris Climate Agreement. This has the headline aim of ensuring global warming does not exceed 2 degrees centigrade, with a target of only 1.5 degrees warming. The agreement will enter into effect in 2020. To date, 180 countries have signed the agreement, including large emitters like the United States, China and Russia – this includes Australia.

This all seems very promising. However, questions abound as to the legitimacy or effectiveness of an international agreement with what some would call limited enforce-ability (the United Nations’ Achilles Heal).  At this time, none of the large emitters have ratified or acceded to the treaty domestically, meaning it does not have legal power in their home countries. There are 24 parties to their treaty currently, who have either ratified or approved the treaty domestically, however these are overwhelmingly small island nations who represent insignificant portions of our global emissions. Tuvalu, the Bahamas, Cook Islands, Fiji and Samoa – all of these nations stand to lose the most from climate change, as the rising tide of global inaction threatens to erase them.

As a result of this agreement-in-form but not substance from the major emitters, the treaty has not been put in to force as it does not yet reach the agreed thresholds – 55 countries whom have ratified the treaty and together represent 55% of global emissions or more.

As previously mentioned, those who have ratified or approved the treaty have the most to lose. Their interests are aligned with the treaty and thus it is no surprise they take action. No longer is it a discussion of the marginal cost of mitigation or adaptation for these countries – they are left with no option. For the others, they bear limited, less tangible or certain consequences. No climate model, to my knowledge, predicts the Russian landmass will be entirely engulfed by the rising tide. Classic moral hazard is at play here – the cost of our inaction is borne not by us, but these smaller island nations. Concurrently, if one nation acts, the benefits will not wholly accrue to this nation. Benefits of action spread, and thus less tangible and certain. Effectively, this means our problem is one of a public goods nature.

The monumental issues of uncertainty, moral hazard and international coordination have been identified by several economists working in this field. Warwick McKibbin of the Australian National University and formerly the Reserve Bank of Australia, has written several articles discussing the economic implications of imposing either of the two most popular market mechanisms to drive down emissions: a ‘carbon tax’ and a emissions trading scheme. Australia has some history with the tax system, after the Gillard Labor government introduced it in 2011 and the Abbott Liberal government repealed it in 2014. The alternative, now supported by the Federal opposition, an Emissions Trading Scheme (ETS), has been adopted elsewhere, most notably the European Union. The effectiveness of these schemes is hotly debated. McKibbin argues that a carbon tax, though economically preferable and the most efficient, is too politically unpopular and too against the interests of powerful economic agents to be viable as a long-term solution. McKibbin identifies the longevity of the system put in place as a key consideration, as a way to mitigate the uncertainty and ensure that firms do not simply discount the potential upside of mitigation or adaptation with the belief that any system put in place would soon be revoked or repealed.

A carbon tax applies a set cost to each unit of carbon emission, effectively correcting for the negative externality and hopefully bringing the quantity emitted back to the ‘socially-optimal level’ by increasing the cost of production. An ETS establishes a set number of permits that are then released and auctioned off. The number of permits is set at some previous level of emission rate, creating a market for the permits and giving them value as firms are incentivized to purchase and/or sell these permits between each other to reduce costs or derive profit from emission reductions they make.

McKibbin and Wilcoxen (2002) outlined their recommendation – a hybrid solution. They argue it combines the best parts of both systems. To decrease moral hazard and create a group of interested parties who would effectively self-monitor the policy’s success and continuation, McKibbin and Wilcoxen suggest giving long-term, perpetual permits to those designated as deserving of compensation (unlike a tax which is indiscriminate in its cost implications). These permits would again be limited to some pre-specified amount set by the government. Secondly, short-term, potentially annual permits would be issued to firms at a cost to allow firms to exceed their permit levels, but still bearing a cost for doing so. These second-class permits would make perpetual permits valuable, and entice firms to adopt mitigation or adaptation processes so they could sell these permits. Similarly, excessive emissions have an explicit cost due to the annual permit costings. The cost of an annual permit could be increased if more abatement is desired. Furthermore, perpetual permits can be re-purchased by governments or environmental groups to again reduce the allowable emission rate.

Crucially, McKibbin argues that this system should maintain allowable trading within national borders, this way giving government more control and eliminating the potential impact of international changes on the value of permits. This also means that international agreements are not required to begin, whilst also allowing quick adoption for other countries.

By creating a market which allows firms and individuals to create wealth through emission abatement, a strong moral hazard problem is mitigated. The negatives of both a carbon tax and an ETS are largely overcome and domestic implementation absent universal global agreement is possible. A clear path for an increase in reduction levels is also possible. However, this system potentially opens up another area in which financial speculators can establish futures, forwards and swaps markets – a growing area of concern for economic stability and policymakers.

Source: the World Bank – State and Trends of Carbon Pricing 2015

The map above displays the current state of play on climate policy. Europe continues to lead the way, with Scandinavia setting aggressive targets and putting in place strong reforms. Some US states have introduced very progressive agendas on climate action, with California recently strengthening their reduction targets, whilst on track to reduce their rates to 1990 levels by 2020. The following graph highlights the greenhouse gas (GHG in the graph) reduction progress:

Source: California Senate website

Despite this progress, the following graph is startling in its reminder of the situation faced:

Line graph of global carbon dioxide emissions from fossil fuels. It shows a slow increase from about 500 million metric tons in 1900 to about 1,500 in 1950. After 1950, the increase in emissions is more rapid, reaching approximately 9,500 in 2011.
Source: T.A., Marland, G., and Andres R.J. (2015). Global, Regional and National Fossil-Fuel CO2 Emissions.

The question originally asked definitely remains unanswered. This whole post may well have left the reader more confused than when they started. Even still, it is worth noting that underneath all of the politicized plans and unenforceable international calls to action, there are pragmatic, realistic alternatives available to policymakers with sound economic foundations. In our current capitalist, democratic society, the only option is creating a market for carbon emission reductions and endowing individuals with permits in this market as a source of wealth. This will align the interests of the CEOs of our large mining companies with the citizens of our small island nations. This is the only realistic method in which to do this. Waiting for universal goodwill to generate the desired outcome may prove too late.

 

 

 

 

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