Big Spender Meets Big Saver

By Adrian Ineichen

The Great Contrast
Recently, President Obama travelled to Asia and visited Japan, the APEC summit in Singapore and went to China and Korea. The contrasts were stark, particularly in China: here comes the representative of the world’s most powerful democracy whose people save on average 3% of their disposable income (at some point in recent years, this figure has been negative) to the world’s largest nation whose people save about 20-25% of disposable income which lifts the gross domestic savings rate above the 50% mark. The big saver has (too?) much invested into the debt of the big spender and fears now that the latter’s bad economic conditions (unemployment above 10%, perennial current account and government deficits, etc.) may render the saver’s US assets that are estimated to top US$ 1.5 trillion less valuable (e.g. through potential inflation in the future or a depreciating dollar).

It is remarkable when the joint China-US statement issued on November 17 during Obama’s China stay says this: “United States will take measures to increase national saving as a share of GDP and promote sustainable non-inflationary growth. To achieve this, the United States is committed to returning the federal budget deficit to a sustainable path and pursuing measures to encourage private saving.”

How often have you seen a country pledging to be financially more responsible in a bilateral communiqué? It is not remarkable  that foreign powers prod the US to act, which may seem embarrassing enough, but it is remarkable because they are right and we should act, but have failed to do so for decades. Germany’s finance minister Schäuble warned last Friday against a looming fresh asset price bubble due to low US interest rates – which are expected to stay low for some time to keep liquidity and credit available – and provides the latest addition to the global concerns about US finances.

It Takes Two to Tango
The big spender (aka big debtor) knows that he has to adjust (boosting domestic savings and exports), but faces an uphill battle, given the urgent task to resolve the current crisis and get financial (and other) regulations right, on the domestic front.

Boosting saving is not easy in a consumption culture, and various policy tools have already proven to be ineffective. C. Fred Bergsten proposes three options worth considering. First, the US could switch from taxing income to taxing consumption which would put pressure on consumption. This idea may also be fruitful on its own as textbook economics tells us that consumption-based taxation has less distortionary effects than income-based taxes. Further, this would allow to clean up the US tax code (if Congress really seizes this once-in-a-lifetime chance) and could kill the current inefficient and administratively onerous retail sales taxes by a value-added taxation system.

Second, the introduction of mandatory savings schemes, let’s say of one or two percent on an individual’s income which could be retained in a separate account and used after retirement as a complement to the social security benefits. Third, medical and social security costs are contained e.g. by a comprehensive health care reform (recall, one of the original ideas of the current health care reform was to contain costs) and by a social security reform that may include the increase of the retirement age (a path that Germany has chosen and many Western European countries are likely to adopt in the future as well, given the demographics) and the reform of contribution and benefit formulas.

At the same time, an effective correction of imbalances requires the big debtor to coordinate with its biggest banker/creditor (i.e. the big saver) who himself has some daunting tasks ahead.

To get back on a sustainable growth path, the mainstream opinion suggests that China should boost domestic consumption and reduce its savings rate. At least three policy options could help. First, an increased redistribution could give high corporate profits away to poor Chinese people who may then spend more. At the same time China should reduce excess capacity and over-investment in certain industries (such as cement, steel, coal etc.). This is the Jonathan Anderson story which emphasizes that most of the savings are made by corporations and thus a resolution of the imbalance would require to start with changing the current industrial policy. It is noteworthy that Chinese investments this year have risen (pushed by stimulus). Second, improving the social safety nets, revamping education facilities and access and expanding public health care can increase spending directly, and may reduce the need for people to save as they can expect to have safer income sources when they are old and to be able to cope with health issues.

Third, the big saver allows for external adjustments to take place. In general, a revalued exchange rate would make Chinese exports less competitive and would thus squeeze corporate profits. While some call for a direct renminbi appreciation, others say that this move may not do much to rebalance the global economy (and may not have a large impact on the US current account deficit). It is likely that both sides miss the point. The key is that the current unofficial peg of the renminbi to the dollar (since summer 2008, after an appreciation path since July 2005) is not sustainable. It leads to foreign exchange surplus whose reinvestment has led to high risks and low returns, is a potential source for domestic Chinese inflation (which may arise in the coming years), and it attracts hot money which increasingly finds its way around China’s capital controls.

As China’s role in the global economy rises, the role of its currency is likely to grow too. To avoid adjustment shockwaves, a pragmatic approach could entail the speeding up of the gradual internationalization of the Renminbi, e.g. by expanding trade settlement or the institutional investor programs (QDII and QFII) while easing regulatory burden on cross-border capital flows. It will be interesting to see how the Chinese nomenklatura adjusts its policies when exports start to grow again and global outlooks further improve in 2010.

Nice to read:
Anderson, J. (2009. “The Myth of Chinese Savings”, Far Eastern Economic Review 172(9; Nov 2009), pp. 24-30.

Bergsten, C. F. (2009). “The Dollar and the Deficit”, Foreign Affairs 88(6; Nov/Dec 2009).

U.S.-China Joint Statement, November 2009
http://www.whitehouse.gov/the-press-office/us-china-joint-statement

Germany warns US on market bubbles
http://www.ft.com/cms/s/0/4ec41a1a-d616-11de-b80f-00144feabdc0.html

The Politics of Labour

by Deena Al Shatti

The UNDP estimates that there are nearly 200 million migrant workers worldwide. Migrant workers often leave their home countries to gain employment in other, more developed countries. Their reasons for migration are varied, but the vast majority move in order to send money home to their families – the World Bank estimates that foreign workers sent over $300 billion back to their home countries in 2008 alone.

However, it is not always a glossy picture. According to the 2009 Trafficking in Persons Report, issued by the U.S. Department of State, only 16% of countries worldwide are considered to be “Tier 1” – that is, countries who’s governments fully comply with the minimum standards set by the Trafficking Victims Protection Act. Most countries in the world do not comply, and, what is worse, are the countries where a majority of migrant workers live and work. Workers in these countries often face a variety of issues, including the holding of passports, unpaid wages and abuse.

There is increasing pressure to implement changes in international labor policies and standards. Most countries have only taken a few first steps – laws may be in place, but they are not enforced stringently enough. For these problems to be solved, governments worldwide need to step up to the challenge. There has been a lot of talk on how to change the way migrant workers are treated, but not much has actually been implemented – and what has been implemented has been done on a very small scale.

In order for change to take place, collaboration must occur. While local governments should enforce rules and laws that are already in place, they must also impose harsher penalties on those who break the law. Workers who have been victimized, whether it is from abuse or from non-payment, should not be treated as if they were in the wrong, which often happens.

Home governments should also get involved and take action. For example, the Indian, Philippines and Bangladeshi governments have imposed a minimum wage for their workers in the Middle East. Of the three, the Philippines embassy has been the most aggressive, running programs to educate citizens of their rights and ensuring that they are paid their proper wages.

These small steps are just the beginning – if there is to be a strong change, the governments must take stronger actions. Collaboration is essential as well, as this is a cross-country issue.

New Media, What (If Any) Effect Do Twitter/Blogs Have On Our Political Discourse

In 2008, nearly 40% of adults in the United States communicated with others about politics using the Internet: 11% posted political content on a blog, 20% shared their political views on twitter, and 33% posted political content on social networking sites such as Facebook and LinkedIn (Pew Center, 2008). Has this phenomenon improved informed public discourse? Has it shattered the electorate? The evidence suggests both have happened to some degree.

This new article was just posted on the online Review, check the rest of it out: http://www9.georgetown.edu/grad/gppi/GPPIReview/index.cfm?tpl=article&articleID=102

 

DC City Council Hearing on the Implementation of Healthy DC

By Tamar Zaidenweber

On Thursday November 12, DC City Council member David Catania, Chair of the Committee on Health, hosted a roundtable hearing on the implementation of Healthy DC. The City Council passed the Healthy DC legislation in 2008, which created an extensive expansion of the Medicaid and DC Alliance programs that will be available to DC residents with household incomes up to 400% of the federal poverty level (FPL) who do not qualify for any other public insurance program. The District’s goal is to move toward universal coverage, without waiting for the Federal Government to require it, and Healthy DC is the next step in that process.

The Council roundtable included two witnesses: Tona Vidal-Kinlow, Vice President of Government Affairs at CareFirst and Dr. Julie Hudman, Director of the DC Department of Health Care Finance. Dr. Hudman presented testimony outlining the current status and structure of the Healthy DC program, the benefit, and the steps to implementation.

The Healthy DC benefit will be structured as a government subsidized insurance buy-in program available to the uninsured population of DC up to 400% of the FPL, allowing them a chance to participate in the health insurance system. The uninsured population in DC, at all income levels, is estimated at about 59,000, according to Dr. Hudman’s report. Healthy DC was created to fill in the gaps within the ranks of the District’s uninsured.

The benefit structure will be comparable to those offered by private plans, but with heavily subsidized premiums, modest co-payments and cost sharing, all of which were indicated in Dr. Hudman’s testimony.

In Dr. Hudman’s presentation to Councilmember Catania, she discussed the steps involved in implementing the Healthy DC Program. At present, Healthy DC is negotiating with the existing Medicaid Managed Care Organizations, and expects to finalize and sign contracts in December. The timeline proposed indicates that coverage is expected to begin in April 2010.

As the Councilmember mentioned, “while the rest of the country seems to be struggling to keep their head above water, we are in the enviable position of looking to further expand the ranks of the insured.” Though the District is facing budget pressures, Councilmember Catania is very dedicated to the future of Healthy DC.

In Ms. Vidal-Kinlow’s testimony and subsequent discussion with the Councilmember , she discussed the $5 million one-time payment that CareFirst is making to the District of Columbia with the intention of it being used to expand insurance coverage. Later, the Councilmember agreed “to at least match the resources coming from CareFirst,” which would bring the budget for this year to $10 million and cover thousands of individuals.

It is clear from this roundtable discussion and previous statements that Councilmember Catania is very dedicated to seeing Healthy DC start providing coverage to the next segment of the population with the goal of universal coverage on the horizon.

To watch the hearing, please see: http://oct.dc.gov/services/on_demand_video/channel13/november2009/11_12_09_HEALTH.asx

Violence in the Chicago Public School System: does the solution lie in the numbers?

by Kim Bernet

With the death toll reaching nearly 25 students this year alone, the Chicago public school system’s violence prevention policy is being given a second look. Ron Huberman, Chief of the Chicago Public School system has gone beyond the traditional policing and punishment tactics with his quantitative analysis approach in addressing the increasing problem. For the first time in the system’s history, statistical data will be taken into account to prevent future violence among the students. Results from the data collected show that the violence is not as random as it was once assumed.

With a $60 million budget from federal stimulus grants, the program assessed 500 students who were violently killed over the past few years. Huberman targeted a number of common traits among the victims. He found that class attendance rates, race, sex, home environment, and classroom behavior were all key traits. Using those same traits and analyzing the current students, he has identified roughly 10,000 students with the highest risk of becoming future victims.

The real question is what action Huberman and his colleagues will take now that the data analysis is complete.

Huberman has outlined a policy to prevent violent action that includes providing the 10,000 potential victims with a part-time job, increasing adult supervision, and having a mentor on call 24 hours a day. He plans to shift the current policy’s focus of punishment and policing to a more mental health centered prevention-based policy.

While Huberman has garnered wide spread applause for his ideas, to date, his policy plans have not been transformed into action. Collecting the data was the easy part. The more challenging aspects still lie ahead, as successful implementation of the program and adequate follow-up research will be key to its effectiveness. Huberman has also yet to outline how they will measure the program’s success.

This new plan comes after countless failed programs aimed at reducing violence in the area, so it is understandable that skepticism is widespread. As the area has a long history of violence and gangs, it is hard to believe that such a targeted approach will make a difference where so many previous attempts have failed. The cultural roots of the gang violence go beyond the reach of the chief of the school district and his policies, but it’s hoped that with this restructuring, the daily lives of these potential victims will be altered, and ultimately saved.

If successful, this policy approach has potential to be a model for other schools with high levels of violence. As a promising solution, the play out of his program will be watched closely by many hopeful families and school systems around the country.