Poverty, Vulnerability and Social Protection

Jomo Kwame Sundaram

According to the World Bank, the MDG target of halving the share of the poor was achieved by 2008, well in advance of 2015, the target year. However, increased unemployment and lower incomes in recent times remind us that poverty is not an unchanging attribute of a shrinking group, but rather, a condition that billions of vulnerable persons risk experiencing.

Despite the various shortcomings of money measures of poverty, they nevertheless reflect the extent of vulnerability. For example, the estimated number of poor globally in 2012 more than doubles from 902 million to 2.1 billion when one raises the poverty line by 63% from $1.90/day to $3.10/day per person, suggesting that a very large number of those not deemed poor by the World Bank are very vulnerable to external economic shocks or changes in personal circumstances, such as income losses or food price increases.

Of the world’s poor, three-quarters live in rural areas where agricultural wage workers suffer the highest incidence of poverty, largely because of low productivity, seasonal unemployment and low wages paid by most rural employers. Vulnerability and economic insecurity have increased in recent decades with rising insecure, casual and precarious jobs involving part-time employment, self-employment, fixed-term work, temporary work, on-call work and home-working – often mainly involving women.

Such trends have grown with labour market liberalization, globalization, and declining union power. To make matters worse, macroeconomic policies in recent decades have focused on low inflation, rather than full employment, while limited social protection has exacerbated economic insecurity and vulnerability.

Additionally, lower economic growth rates, following the global financial crisis, would push 46 million more people into extreme poverty than expected before the crisis. This figure was later revised to 64 million, implying over 200 million people fell into extreme poverty due to food-fuel price hikes and the global financial crisis.

While some of these figures were subsequently revised downward, they suggest widespread vulnerability and economic insecurity, due to the inability of governments to respond with adequate counter-cyclical policies and in the absence of comprehensive universal social protection measures. During the East Asian financial crisis of 1997-1998, the official poverty rate in Indonesia shot up from 11% to 37% in just one year following the massive depreciation of the Indonesian rupiah.

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Robert Pollin on “Green Growth”

Robert Pollin is professor of economics at the University of Massachusetts Amherst and co-director of the Political Economy Research Institute (PERI).

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Overcharged: The High Cost of High Finance

Gerald Epstein and Juan Antonio Montecino

Gerald Epstein is a professor of economics and Co-Director of the Political Economy Research Institute (PERI) at the University of Massachusetts Amherst. Juan Antonio Montecino is a doctoral student in economics at the University of Massachusetts Amherst. This is an excerpt from a report Epstein and Montecino wrote for the Roosevelt Institute. The full report is available here.

A healthy financial system is one that channels finance to productive investment, helps families save for and finance big expenses such as higher education and retirement, provides products such as insurance to help reduce risk, creates sufficient amounts of useful liquidity, runs an efficient payments mechanism, and generates financial innovations to do all these useful things more cheaply and effectively. All of these functions are crucial to a stable and productive market economy. But after decades of deregulation, the current U.S. financial system has evolved into a highly speculative system that has failed rather spectacularly at performing these critical tasks.

What has this flawed financial system cost the U.S. economy? How much have American families, taxpayers, and businesses been “overcharged” as a result of these questionable financial activities? In this report, we estimate these costs by analyzing three components: (1) rents, or excess profits; (2) misallocation costs, or the price of diverting resources away from more productive activities; and (3) crisis costs, meaning the cost of the 2008 financial crisis. Adding these together, we estimate that the financial system will impose an excess cost of as much as $22.7 trillion between 1990 and 2023, making finance in its current form a net drag on the American economy.

First, we estimate the rents obtained by the financial sector. Through a variety of mechanisms including anticompetitive practices, the marketing of excessively complex and risky products, government subsidies such as financial bailouts, and even fraudulent activities, bankers receive excess pay and profits for the services they provide to customers. By overcharging for products and services, financial firms grab a bigger slice of the economic pie at the expense of their customers and taxpayers. We estimate that the total cost of financial rents amounted to $3.6 trillion–$4.2 trillion between 1990 and 2005.

Second are misallocation costs. Speculative finance does not just grab a bigger slice of the pie; its structure and activities are often destructive, meaning it also shrinks the size of the economic pie by reducing growth. This is most obvious in the case of the financial crisis, but speculative finance harms the economy on a daily basis. It does this by growing too large, utilizing too many skilled and productive workers, imposing short-term orientations on businesses, and starving some businesses and households of needed credit. We estimate that the cost of misallocating human and financial resources amounted to $2.6 trillion–$3.9 trillion between 1990 and 2005.

Adding rent and misallocation costs, we show that, even without taking into account the financial crisis, the financial system cost between $6.3 trillion and $8.2 trillion more than the benefits it provided during the period 1990–2005.

On top of this is the massive cost of the financial crisis itself, which most analysts agree was largely associated with the practices of speculative finance. If we add conservative Federal Reserve estimates of the cost of the crisis in terms of lost output ($6.5 trillion–$14.5 trillion), it brings the total amount of “overcharging” to somewhere between $12.9 trillion and $22.7 trillion. This amount represents between $40,000 and $70,000 for every man, woman, and child in the U.S., or between $105,000 and $184,000 for the typical American family. Without this loss, the typical American household would have doubled its wealth at retirement.

These excess costs of finance can be reduced and the financial sector can once again play a more productive role in society. To accomplish this, we need three complementary approaches: improved financial regulation, building on what Dodd-Frank has already accomplished; a restructuring of the financial system to better serve the needs of our communities, small businesses, households, and public entities; and public financial alternatives, such as cooperative banks and specialized public financial institutions , to level the playing field.

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The Eurozone Crisis: Monetary Union and Fiscal Disunion, Part 2

Alejandro Reuss

Alejandro Reuss is co-editor of Triple Crisis blog and Dollars & Sense magazine. He is a historian and economist. This is the second part of a two-part series. Part 1 is available here. His article “An Historical Perspective on Brexit: Capitalist Internationalism, Reactionary Nationalism, and Socialist Internationalism” is available here.

Not United Enough?

If one could argue that the eurozone was “too united,” in regard to monetary union, one could equally argue that it was not united enough, in terms of the lack of fiscal union. In a federal political structure, fiscal union means that households and firms in the member states pay their taxes (at least in part) into a common federal treasury, and expenditures are paid out from this treasury back to people across the member states. This is not an exotic idea: The United States is a fiscal union in precisely this sense.

During a business-cycle downturn, a standard “Keynesian” policy response is to increase government spending or reduce taxes (or both)—to boost demand, output, and employment. Governments may push through new spending and tax legislation (fiscal “stimulus” programs) for this purpose—as, indeed, the U.S. government did during the Great Recession. However, some existing government programs result in increased government spending and reduced tax collection during downturns without any need for deliberate policy changes. These are known as “automatic stabilizers.” As an economy goes into a downturn, some people lose their jobs. Some see their hours cut. This reduces their incomes—but since many taxes are dependent on incomes, tax collections are reduced automatically. This helps to blunt the impact of the downturn. (As a thought experiment, to see how things would be if this were not the case, imagine that incomes were falling but each person or household still had to pay a fixed monthly tax bill.) There are automatic stabilizers on the revenue side as well. Government expenditures on unemployment insurance, for example, rise as people start losing their jobs. So, too, do public expenditures on pensions (like Social Security in the United States), as some employers downsize by enticing older workers to take “early retirement.” These expenditures, too, slow the fall in demand, compared to what it would be otherwise.

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Care Work as the Work of the Future

C.P. Chandrasekhar and Jayati Ghosh

Across the world there is much gloom and doom about the impact of technological changes on jobs, as automation and other innovations are seen to threaten not just blue-collar jobs but also many forms of office work. It is true that the way that most of our economies are organised at present, heavily reliant on market mechanisms with less and less public intervention to alleviate the adverse effects, there could well be an increase in technology- driven unemployment.

But even so, some of the extreme pessimism may be misplaced because of the possible emergence of other forms of employment that are more based on human interaction. Particularly, some essential services that enhance the quality of life – which are often broadly clubbed into the composite term “the care economy” – are unlikely to be either as efficient or as socially useful if the element of human interaction is reduced.

Many care services necessarily require face to face relationships, and even if technologies can assist in these and make them more productive, the human element cannot be eliminated. Indeed, better quality care (whether in paid or unpaid forms) typically requires more intensive human input, so standard approaches based on puerile notions of labour productivity are simply irrelevant in such activities.

This in turn means that the care economy broadly defined will continue to be an important source of employment generation in the foreseeable future, and is likely to expand at a faster rate than many other economic activities. This is especially so in the many countries – certainly across the developing world – where care services are currently hugely underprovided by society and therefore forced to be delivered (often in extremely difficult
and haphazard ways) by unpaid family labour.

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Expansionary Fiscal Consolidation Myth

Anis Chowdhury and Jomo Kwame Sundaram

The debt crisis in Europe continues to drag on. Drastic measures to cut government debts and deficits, including by replacing democratically elected governments with ‘technocrats’, have only made things worse. The more recent drastic expenditure cuts in Europe to quickly reduce public finance deficits have not only adversely impacted the lives of millions as unemployment soared. The actions also seem to have killed the goose that lay the golden egg of economic growth, resulting in a ‘low growth’ debt trap.

Government debt in the Euro zone reached nearly 92 per cent of GDP at the end of 2014, the highest level since the single currency was introduced in 1999. It dropped marginally to 90.7 per cent at the end of 2015, but is still about 50 per cent higher than the maximum allowed level of 60 per cent set by the Stability and Growth Pact rules designed to make sure EU members “pursue sound public finances and coordinate their fiscal policies”. The debt-GDP ratio was 66 per cent in 2007 before the crisis.

High debt is, of course, of concern. But as the experiences of the Euro zone countries clearly demonstrate, countries cannot come out of debt through drastic cuts in spending, especially when the global economic growth remains tepid, and there is no scope for the rapid rise of export demand. Instead, drastic public expenditure cuts are jeopardizing growth, creating a vicious circle of low growth-high debt, as noted by the IMF in its October 2015 World Economic Outlook.

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The Eurozone Crisis: Monetary Union and Fiscal Disunion, Part 1

Alejandro Reuss

Alejandro Reuss is co-editor of Triple Crisis blog and Dollars & Sense magazine. He is a historian and economist. This is the first part of a two-part series. His article “An Historical Perspective on Brexit: Capitalist Internationalism, Reactionary Nationalism, and Socialist Internationalism” is available here.

In 2007–8, after the real estate bubble burst, the entire U.S. economy plunged into a deep recession, the worst since the 1930s. But the downturn hit some parts of the country harder than others. Overall, real gross domestic product shrank by just over 4% between the pre-recession peak and the trough. Meanwhile, Florida, for example, saw its state GDP decline by over 11%—so, more than 2½ times as much. The official unemployment rate for the United States as a whole more than doubled from a pre-recession low of 4.4% (May 2007) to a peak of 10.0% (October 2009). In Florida, it more than tripled, from 3.1% (March–April 2006) to 11.2% (November 2009–January 2010). Florida’s state and local tax revenues declined from nearly $37.5 billion in fiscal year 2006 to about $28.8 billion in fiscal year 2010.

Do you remember, then, how officials from Florida had to engage in protracted negotiations with the federal government—the Department of the Treasury, the Federal Reserve, etc.—to get federal assistance in dealing with the crisis? Do you remember the recriminations from the governors and legislators of other, less severely affected states, decrying Floridians for their profligate spending and lazy work habits? Federal authorities’ insistence on state tax hikes and deep spending cuts, as Florida’s just penance for a crisis of its own making? The mass marches in the streets of Miami, Tampa, and Tallahassee as Floridians resisted this painful austerity?

Me neither.

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The Economics of Political Change in Developed Countries

Jayati Ghosh

Across the world, people have been watching recent political changes in developed countries with a mixture of bemusement and shock. From the recent anointment of Donald Trump as the Republican candidate for US President, to the rise and spread of blatantly racist anti-immigration political parties and movements in Europe, it is clear that there are tectonic shifts under way in the political discourse and practice in these countries. As these changes have gone from the unthinkable to the depressingly predictable, there are increasingly desperate attempts to understand what is driving them. This is especially the case because – despite all the talk of a shift in global power to some large “emerging nations” – what happens in the developed countries still matters hugely in international relations and to all of us in the rest of the world.

It is now obvious that increasing inequality, stagnant real incomes of working people and the increasing material fragility of daily life have all played roles in creating a strong sense of dissatisfaction among ordinary people in the rich countries. While even the poor amongst them still continue to be hugely better off than the vast majority of people in the developing world, their own perceptions are quite different, and they increasingly see themselves as the victims of globalisation.

But while this is increasingly recognised, the full extent of recent economic trends is probably less well known. A new report from the McKinsey Global Institute (“Poorer Than Their Parents? Flat or falling incomes in advanced economies”, July 2016) brings out in detail how the past decade in particular has been significantly worse for many people in the developed world.

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Shaky State of North-South Relations

Martin Khor

The UN’s leading development organisation just got a renewed mandate for its work, but not without difficulty because the developed countries are tighter with their concessions to the developing countries. The process in attaining it shows the not too healthy state of North-South relations.

The United Nations’ leading organisation for discussions on economic issues has recently concluded its conference, held once in four years, by adopting two declarations.

That is seen as another success in international co-operation, this time on trade, development and related issues. However, agreement was reached only after a lot of difficult wrangling between the developed and developing countries.

The process showed up the shaky and not too healthy state of North-South relations.

The 14th session of the UN Conference on Trade and Deve­lopment (dubbed Unctad 14) was held in Nairobi between July 17 and 22.

Formed in 1964, Unctad is the UN’s premier economic development organisation. In its heyday from the 1960s to the 1980s, Unctad was a major trade negotiating centre, specialising in global commodity agreements.

It helped lead the developing countries’ initiative for a “new international economic order”.

It was also designated the UN’s focal point for the integrated treatment of trade and development and with areas of finance, technology and investment.

For over half a century, Unctad has championed the cause of developing countries. But in recent years, under the influence of developed countries, its role was downgraded.

Many important issues were given to other organisations, over which the developed countries have more control, such as the OECD, World Trade Organisation, IMF and World Bank.

The two declarations adopted in Nairobi summarised the countries’ views on trade and economic issues and Unctad’s role in the next four years.

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