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Saturday, September 1, 2012

The Federal Reserve on Full Employment: A Democracy Deficit?

The American economy expanded during the second quarter of 2012 at an annualized rate of 1.7 percent. Meanwhile, the unemployment rate for all of the American states combined was expected to remain above 8 percent. In this context, the chairman of the Federal Reserve, Ben Bernanke, remarked, “It is important to achieve further progress, particularly in the labor market.” In other words, the free market cannot be relied on to reach full employment. More is needed. “Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.” In other words, the central bank would enact a pro-employment policy. From the standpoint of democracy, the choice of the Fed to engage in such a policy is a double-edged sword.

                                                                                                   Fed Chairman Bernanke.                    Reuters
On the one hand, Bernanke was able to defy political pressure from Republicans to refrain from such a measure. Sen. Charles Schumer (D-NY) said that the Fed chief “should not let any political backlash deter him from following through and doing the right thing.” At the very least, short-term political pressures oriented to an upcoming election should not be allowed to thwart more long-term policy oriented to full employment.
On the other hand, from the standpoint of democratic legitimacy, a policy enacted by a body that is buffered from elected representatives can be problematic. Ironically, it was Bernanke who had urged Henry Paulson of the U.S. Treasury to appeal to Congress to pass the bank bailout (TARP) because only such passage could have democratic legitimacy. Accordingly, Sen. Bob Corker (R-TN) had this to say of Bernanke’s musings on a pro-employment policy from the central bank. “Policies from Congress, not more short-term stimulus from the Fed, are the ingredients necessary for restoring growth in the American economy.” The senator could have cited the U.S. constitutional convention, whose delegates had vested the U.S. House of Representatives with the sole power to initiate spending (i.e., the power of the purse). It is particularly dangerous for a body insulated from political pressure to engage in economic stimulus if that body has the unlimited power to create money. At the very least, inflation could ensue from too much stimulating; and yet, it should not be supposed that the market itself can reach full employment.
It may be that the constitutional design of American federalism wherein the various checks and balances on the federal level operate in effect to “push” policy down to the republic or state level. Employment policy from the Federal Reserve could simply be the point of least resistance. In other words, the central bank may be the only option short of the state governments when the Congress and the U.S. president are at logger-heads. The cost is not simply in terms of democratic legitimacy, for the American founders made federal legislation difficult to enact in part so the federal government would not encroach on the powers reserved to the member states. In other words, action by the Fed may take the pressure off the federal elected representatives, but at the expense of federalism (i.e., the state governments being able to check the federal government). To be sure, full employment is a worthy objective, but the “how” and “by whom” are also worthy of consideration.


Binyamin Appelbaum, “Fed Chairman Makes Case, in Strong Terms, for New Action,” The New York Times, August 31, 2012. http://www.nytimes.com/2012/09/01/business/economy/fed-chairman-pushes-hard-for-new-steps-to-spur-growth.html?_r=1&hp


Full Employment in a Republic: Hollande’s France

Facing an unemployment rate of 10% in his state, with youth particularly hard-hit (23% for those under the age of 25), Francois Hollande of the state of France announced in August 2012 a new initiative for the legislature to pay most of the salaries of tens of thousands of young people hired in 2013. Young Europeans have  been hard-hit by the laborious labor laws that make it difficult for companies to let people go. Some E.U. states, including France, have proposed modest tax breaks for companies that hire people just entering the workforce, but no one is under the impression that such proposals will redress the underlying structural problem.

 Hollande, a Socialist, of the E.U. state of France.            The Telegraph

Fundamentally, there is no guarantee that a competitive market will come to an equilibrium at full employment. Accordingly, government has a legitimate role in picking up the slack, such that ideally any able-bodied adult who wants to work can have a job. In the state of France, the plan being proposed by Hollande in August 2012 would have companies that hire a person between 16 and 25 for at least a year pay as little as 25 percent of the person’s salary (for up to three years). In this way, the state hoped to create 100,000 new jobs in 2013 and 50,000 in 2014.

While managements would doubtless see this as a bargain, the question is whether other jobs would be put at risk given the 25 percent of the salary being paid by the companies. A clever manager might try to increase the proportion of the employees for whom the company must pay only 25 percent. Increasing the proportion would mean letting some non-subsidized employees go. The cost structure assumed could be a basis of sustainable competitive advantage if competitors do not also have such an arrangement. In other words, do government-subsidized jobs in the private sector add much in the way of the total employment of a company (and thus of the economy as a whole)?

One might also consider the matter of France’s deficit. Under E.U. law, it cannot exceed 3.5% of the state’s total economic output. Hollande’s strategy going into office was to offset the additional spending with a tax increase on the rich, yet even in anticipation of this some rich French were relocating to Belgium, a state with lower income taxes on the rich. California, which at the time also had an unemployment rate of just over 10 percent and a youth rate of 23 percent, also suffered from a budget deficit and a proposal by Brown to increase taxes. Unlike France, however, California faced no federal law limiting the deficit. In this respect, the E.U. was already a more consolidated federal system than was the U.S.

In short, the problem of individuals undercutting a policy for the whole is evident. A company’s manager seeking to take undue advantage of subsidized labor is like the rich person who seeks to avoid paying higher taxes by going to another state. To be more effective, government policy needs to figure out how to minimize such opportunism that is at the expense of the whole. Thomas Jefferson and John Adams both assumed that a virtuous citizenry is required for a republic to work. In the cases both of France and California, reaching full employment and achieving fiscal balance in the government may well come down to whether the respective citizenry does not try to exploit the requisite government policies.

It could even be said that a society or civil contract that is disvalued in the face of widespread opportunism deserves to fail.  Managers use “corporate citizenship” as window-dressing, yet without any sense of obligation to anything beyond the company. Doubtless there are rich people whose motivation to minimize even taxes they can pay dwarfs any sense of staying put and riding out the storm with everyone else (i.e., we are all in it together). If we are not all “in it,” then there is no We, as in We the People.


Sylvie Corbet and Sarah DiLorenzo, “French Government Offers to Pay Most of Young Hires’ Salaries,” The Huffington Post, August 28, 2012. http://www.huffingtonpost.com/2012/08/29/french-salaries-young-hires_n_1839663.html?utm_hp_ref=business

Thursday, August 30, 2012

No Guilt at Citibank

In the days leading up to Labor Day 2012, Citigroup announced that the bank would pay $590 million to settle a class-action lawsuit by stockholders who contended that the bank’s management as well as some directors had misled the stockholders about the bank’s exposure to subprime mortgage debt in 2007. The bank had used improper accounting practices to show an inflated asset base. The shareholders claim that the bank assured them that it had sold billions of dollars in collateralized debt obligations based on subprime mortgages. However, the bank had actually guaranteed the securities against any losses. To further disguise the risks to the stockholders, the bank moved the guarantees to separate entities. Unfortunately, the settlement is insufficient as a means to thwart banks such as Citibank from misleading investors. Legislators might want to look at two reforms in particular.

The full essay is at "No Guilt at Citibank."

See: Cases of Unethical Business
, available in print and as an ebook at Amazon.com.  

Monday, August 27, 2012

The West Crawling on Syria

Those who laud the efficiency of the market mechanism are particularly wont to point to the slow mechanizations of government machinery. Cautiousness along with a subtle bias in favor of the status quo may be the culprit. For example, after perhaps a year of urgings by Western governments for Assad of Syria to step down, finally a lone governor of a large E.U. state ventured to say that his state would recognize Assad’s opposition as the legitimate government of Syria. “France asks the Syrian opposition to form a provisional government — inclusive and representative — that can become the legitimate representative of the new Syria,” Francois Hollande was quoted by news agencies as saying on August 27, 2012 during a speech at the Élysée Palace. “France will recognize the provisional government of Syria once it is formed.” It is perfectly reasonable to ask whether the statement would make any difference in Syria.
Part of the reason why European states formed a union was because a united front would have more power both economically and politically. Were the E.U. Parliament to offer to recognize Assad’s opposition as the legitimate government of Syria, the announcement would have more punch behind it. This is why the American states consolidated their foreign-policy power at the union level. Simply put, the world would be more likely to deem it as important.
Beyond the question of whether the E.U. should take on a greater role in foreign policy (the union does have a foreign minister) is the matter of why Western governments were so reluctant (or slow) to recognize Assad’s opposition as the government of Syria. American officials had stated that Assad had lost the right to rule because his government had turned on so many Syrian civilians in killing them. The recognition of another government is more or less implied. Why not make it official? Why hold on so to the status quo, even after it has been deemed to be illegitimate?  Put another way, why must so many people be killed before even an implied step is taken?
Strategic concerns typically weigh heavily in the formulation of foreign policy. The possible reactions of China and Russia were no doubt salient in the calculations of the foreign policy experts at the time. Even so, it seems that too much cautiousness (i.e., avoiding even a low-probability negative reaction) goes with the calculating orientation itself in the formulation of foreign policy, which can be at the expense of common sense. If Assad was no longer held as the legitimate ruler of Syria, it follows that some other person or group could (and should) be recognized as legitimate. Furthermore, that such recognition would trigger Russian military retaliation should have been regarded as a stretch at best. The result of the excess cautiousness is that Russia and China were essentially able to proclaim the status quo as the default (a default whose legitimacy had been explicitly refuted in the West).
Put another way, the desire not to rock the boat even just a bit by paddling can be self-defeating if the boat is filling up with water. The mechanism by which Western governments formulate and implement foreign policy may be too mired in statecraft at the expense of not only common sense, but also the human rights of a people elsewhere in the world.

Kareem Fahim and Rick Gladstone, “France Says It Would Recognize Provisional Syrian Government,” The New York Times, August 27, 2012. http://www.nytimes.com/2012/08/28/world/middleeast/rebels-claim-to-shoot-down-syrian-helicopter.html?_r=1&ref=world