The Sustainability Transition

to a New Green Economy

Archive for November, 2011

The Tobin Tax Debate

Posted by Maggie Winslow on November 14, 2011

The EU and UK are currently contemplating instating a financial transaction tax, sometimes called a “Robin Hood” or Tobin Tax.  The Tobin Tax was first proposed by Nobel Prize-winning, brilliant economist James Tobin in 1974 (I like his work so much, I named my son Tobin).  The original proposed tax was on international financial transactions to help curtail exchange rate speculation, which could lead to tremendous volatility in the international exchange market.  One tenth of one percent of the value of the transaction would be the taxed amount.  The proceeds from the tax would be used to pay down the growing debt of developing countries.

In some incarnations, the Tobin Tax, or what the Brits call the Robin Hood Tax when the revenues are used for aid projects, would be on a much broader array of financial transactions, not just international currency transactions, to help limit speculation and high volume, small margin bets. The revenue raised could be used for a variety of aid projects, both international and within the country where the tax is collected.  You can read a bit about the pros and cons of a Tobin Tax here and here.

The European Commission has proposed that a financial trasaction tax be adopted and it has received broad support.  Wolfgang Schauble, the German minister of finance, Angela Merkel, the German Chancellor, French President Nicolas Sarkozy, and former UK prime Minester Gordon Brown all support the tax and have suggested that a financial transaction tax is needed to reduce speculative trading and that the Eurozone should go ahead with the tax even if the UK rejects the tax.

The tax also has serious detractors including UK Chancellor George Osborne who has argued that the tax will cost jobs and not affect banks but will fall on pensioners, and, if it is imposed, it needs to be global.

Last month, the EU seemed to have  on the verge of passing the tax but one important concern, that became a stumbling block, was that an EU tax will benefit banking centers where there is no tax, such as Wall Street.  The proposal appears to be stalled in Europe right now.  It probably will be for a while given all the other issues that European finance ministers need to focus on.

And in the U.S.?  In the first week of November, Representative Peter DeFazio (D – Oregon) and Senator Tom Harken (D – Iowa) introduced similar bills in the House and  Senate calling for a 0.03% tax on financial transactions involving stocks, bonds, and derivatives, to take effect in 2013.   It seems somewhat unlikely that Congress will pass any sort of financial transaction tax in the near future.  In addition, President Obama said that he does not support a financial transaction tax.   Unfortunately, the lack of support for a Tobin Tax in the US makes the tax less palatable in Europe.

Although the idea of a financial transaction tax is yet to gain much traction in the U.S., it is not going away either.   A slew of both US and global groups support financial transaction taxes of one form or another.

With increased awareness of the power of financial institutions, thanks to the Take Back Wall Street movement as well as the Move Your Money movement, the Tobin tax might find ever-greater support.  Who knows what the future may hold.

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Neoclassical Neanderthals

Posted by Maggie Winslow on November 14, 2011

Neoclassical economics envisions a Homo Economicus who is, among other things, independent, selfish, and self-centered.  The selfish acts of these Homo Economici together lead to a rational and optimal outcome for society as a whole.  Each person acting to maximize his or her outcome will end up benefiting society as a whole. The average person acting in his own best interest will purchase best goods for the price. Efficient industries and producers are then promoted, and to maximize profits, these efficient firms produce goods in the most cost effective manner possible.

Behavioral Economists have found that people are not as selfish or as rational as neoclassical economics suggests, that altruism is real, and that people often think of others in their purchasing and production decisions.    Many of us can verify this from our own personal experiences.

Recent discoveries about Neanderthals confirm that they were larger, stronger, more resilient than Homo Sapiens but Homo Sapiens out-competed Neanderthals (after a bout of interbreeding).  How and why did this happen?  DNA testing is still looking for clues about what makes us different from Neanderthals.   One likely theory is that Neanderthals did not work together.  They were self-focused rather than community focused. Humans have worked together since early on, as ancient temples can attest.  Our ability to work together towards common goals has allowed us to dominate other species on Earth (at least for now).  Imagining a Homo Economicus who is selfish and self-centered is to deny a fundamental human characteristic that has allowed us to thrive.    The success and ‘sustainability’ of our species depends on our culture (shared language, values, norms, institutions, etc.) far more than on any individual, selfish traits.

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Increasing Labor Productivity and Unemployment

Posted by Maggie Winslow on November 14, 2011

How are we going to return to full employment in the U.S.?  We can’t just keep producing more and different consumer goods, hoping jobs will come from their production and consumption.  We don’t have the natural capital for that plan.  But, what if everyone could afford to work fewer hours so that the work could be spread around?

As Juliet Schor has documented, labor productivity has increased tremendously over the past 50 years yet this has not translated into fewer work hours.  In fact, since the 70s, work hours have increased.  In addition, only a fraction of the associated wealth, the value created by labor, has gone to the workers.  The lion’s share has gone to capital, in the form of increased profits, and higher wages for top management.

Increased productivity has translated into lower prices for many consumer goods and more material wealth for the average family.  Yet, U.S. workers have far less vacation time than workers in other OECD nations.

Increased labor productivity is also contributing to high levels of unemployment.  Many production processes have become automated, requiring far fewer workers for the same level of output.  Also, facilitated by technological advances, many jobs are being done by the customer, such as pumping gas and scanning groceries, also reducing the need for workers.  Unemployment has been further increased in the U.S. through the globalization of production.  There are over 200 million unemployed people worldwide, many competing for the same jobs.

When the competition for jobs increases, the power of labor decreases, especially for unskilled labor.  It’s hard for a worker to argue for higher wages or a shorter workweek when there are many unemployed people who would gladly take his or her  job.  This helps to explain why workers aren’t getting a fair share of their contribution to production.

So what is the solution? Decreasing labor productivity across the board is not a good solution.  Why work more hours for the same output when this time could be spent elsewhere?  What about increasing the fraction of income that goes to workers, letting workers work a shorter work week, and hiring unemployed people to make up for the lost hours?

The health of our economy depends on high employment levels and a more equal distribution of income so that people have money to spend.  While most all firms would benefit from higher national employment levels and a more equal distribution of income, most firms are not willing to hire more workers nor pay higher wages to workers than profit maximization dictates. (Some firms do pay higher than market wages, or “efficiency wages,” to keep workers motivated and maintain high retention levels. This is part of their profit calculation.) Due to the high costs of providing benefits, firms also have an incentive to get as much work from one worker as possible and to avoid allowing job-shares.  It is far cheaper for a company to have one more-than-full-time worker than two part-time workers.  We end up with a situation where all firms could benefit from higher national employment levels but no single firm has an incentive to work towards these goals individually.  There is a coordination problem.

The solution lies in government intervention: provide incentives for companies to hire more workers or to allow job sharing to counter the high costs of benefits.  Germany does this and it works.  Even better, the government could provide healthcare so companies would not need to bear this burden.  Then the many people who would love to work part-time and spend more time with their children, but can’t because they need health insurance, could work less.   More part-time workers would mean more jobs available for people without work.  That would be better for everyone.

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The Global Economy: Just a Trough in the Business Cycle?

Posted by Maggie Winslow on November 4, 2011

What should we be thinking about the state of the global economy?  Are we just in the bottom of a very deep business cycle and, once housing asset bubbles clear out of the system and consumers regain confidence and lenders start lending again, all will be well?  Or is the situation more profound than that?   Here are some features of the situation as it stands:

High global unemployment stemming from both the globalization of production, population growth, as well as increased labor productivity.

Environmental degradation due largely to unregulated growth.  This leads to poor health, lower worker productivity, migration, social unrest, and potential disruptions in manufacturing.

Resource depletion, which can lead to manufacturing disruptions, price spikes, migration, food shortages.

Increasing inequality and too much wealth going to a few people.  This results in decreased demand by cash-strapped consumers, bidding up of asset prices by those looking for a place to store their wealth, poor health, social unrest (Occupy Wall Street for example), apathy, and constrained democracy.

Debt and global financial imbalances.  There is large and increasing debt in the US and much of Europe and South America, which can curtail consumer spending and economic growth.  There is excess savings in China and the oil producing nations.  These imbalances can lead to instability in global markets.

Fragility of the financial system. Trillions of dollars flow through the global economy daily, somewhat unmanaged and unregulated.  This situation is ripe for major and sudden shifts in the financial markets, crashing a county’s currency or a stock market for no profound underlying reason.

Obviously, these problems are interrelated.  For example, high unemployment results in less power for workers, which leads to increasing income disparities.   Increased inequality leads to concentrations of wealth that allow for greater swings in the financial system.  Increased concentration of wealth also allows for more investment in capital, reducing the need for labor.

Of greater concern is that the traditional prescribed solutions for some problems hit up against the problem of ecosystem limits.  Can we spend our way out of unemployment?  Not if we are buying consumer goods, the manufacturing of which require increased resource depletion and degradation.  What about the global imbalances? Can China shift to a domestic based economy.  Again, resource shortages could impinge on this solution.

With the ever-growing population, the shrinking availability of resources, and the skewed distribution of income, this is not just a deep business cycle.  Full employment in the US is not going to come about through price adjustments.   Global population in the early 1930’s was one third of what it is today, global trade was a mere fraction of today’s trade, resources were more abundant and climate change was not a pressing issue.  Today’s recession is far more intractable than the recession of the 30s even though that was a deeper recession.

An excellent report titled “The Way Forward” by Daniel Alpert, Robert Hockett, and Noriel Roubini of the New America Foundation presents a three-pronged recovery plan consisting of public investment in infrastructure improvements, debt-restructuring, and a variety of global reforms to rebalance global finances.  These are all valuable and probably necessary strategies.  However, we focus on remedies that ignore resource scarcity, degradation, and climate change at our own peril.

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