“AOC, Bernie Sanders confuse inequality with poverty” by Jerry Haar

Published in The Hill (April 27th,2019),”AOC, Bernie Sanders confuse inequality with poverty”

AOC, Bernie Sanders confuse inequality with poverty

Jerry Haar

“Socialism,” anathema to many but a path worth exploring to others, has been packaged nicely as “democratic socialism” (a hilarious oxymoron) by millionaire author Sen. Bernie Sanders (I-Vt.) and proselytized by neophyte Rep. Alexandria Ocasio-Cortez (D-N.Y.) who, like the president, invents statistics extemporaneously.

But in all fairness, neither is a socialist in the true sense of the term, meaning a belief in government ownership of production and the abolition of private property.

Since more than half of Democrats, millennials and minorities hold socialism in higher regard than capitalism, one wonders if these groups truly understand what life is like, say, for the average Cuban. On the other hand, Americans as whole, according to Gallup, prefer capitalism 56 percent to 37 percent.

One can surmise that those who embrace or warm to socialism in reality wish to see a larger, more activist role of government, such as FDR’s New Deal and Lyndon Johnson’s “Great Society,” rather than adherence to socialist economics.

Whatever the case, the progressive wing of the Democrat Party will push its base further leftward; and the one socioeconomic issue they will try to bring along centrist Democrats, independents and even some moderate Republicans on is inequality.

Yet, inequality matters far less than poverty. Culling through the economic literature, one finds little evidence that economic inequality increases poverty; and while redistribution may reduce overall inequality, it is less helpful in lifting people out of poverty.

Economist Branko Milanovic notes that global income inequality fell between 1988 and 2008 for the first time since the Industrial Revolution.

Admittedly, inequality statistics in general are flawed, since they provide only a snapshot of income or wealth distribution at a point in time. Yet, that does not deter celebrity economists of the left, like France’s Thomas Piketty and Joseph Stiglitz to falsely claim that income inequality in the U.S. is at a record high.

They erroneously take as a measure “market income,” but this measure does not take into account taxes or transfer payments or changes in household size or composition.

Their solution? Raise taxes on the rich, despite as noted by French economist Frédéric Bastiat in the early 19th century, it is a disincentive to working harder and taking risks, resulting in lost savings and investment that could generate employment and tax revenue from output and productivity.

Explain that to AOC, whose tax proposal would raise top marginal rates to 70 percent to fight the war against inequality. Like her budget-busting Green New Deal, the massive increase in taxes would wreak havoc on economic growth, employment and capital formation in the U.S.  

Our Canadian neighbors would have to build a wall to keep out the hordes of Americans seeking to flee to a “tax haven” where the average rate is 26 percent.

What about poverty, then? 

Poverty is a serious problem, unquestionably; but it has declined over the last 50 years. The U.S. government has spent over $750 billion on major assistance programs for low-income Americans (including food stamps, Medicaid and housing assistance), none of which is included when calculating the poverty rate.

These safety-net programs helped reduce the number in poverty, especially African Americans, Hispanics, single mothers, and those without a high school diploma. The latest U.S. Census data reveal that poverty rates have declined in 13 of 25 of the most populous metro areas, including New York, Atlanta, Washington, Miami, Chicago and Los Angeles. 

Returning to the issue of inequality, Nobel laureate economist Sir Angus Deaton has found, countries with the greatest degree of inequality are also the countries in which there are significant disparities in opportunity.

Toward that end, the prudent course is not to raise taxes on the producers in society but to expand opportunities, reform occupational licensing and other regulatory barriers to entrepreneurship, reform criminal justice, provide apprentice training and re-training, and child care. 

Poverty alleviation — where we have made great strides — not inequality, should be of paramount importance.

Every semester I have at least one bleeding-heart student who rants about inequality. My response: “If you swap out your moped for a pre-owned Ford Taurus, why should you be concerned if I trade in my new Honda Accord next year for a C-class Mercedes-Benz?” (That usually works.)

Left-wing populism is as insidious as the right-wing variety. Expanding the economic pie, increasing opportunity and continuing to reduce poverty should by top public-policy priorities. Attacking inequality is a futile distraction.

Jerry Haar is a professor of international business at Florida International University and a Global Fellow at the Woodrow Wilson International Center for Scholars in Washington, D.C.

“For Latin America and the Caribbean, an Age of Anxiety” by Jerry Haar

Published in the Miami Herald (January 18th, 2019), “For Latin America and the Carribean, an Age of Anxiety” discusses the economic outlook for the Americas.

For Latin American and the Caribbean, an Age of Anxiety
by Jerry Haar
January 18th, 2019

In 1947, the famous British poet W.H. Auden penned “The Age of Anxiety”. This moniker is an apt description of the economic (not to mention psychosocial) environment in which we find ourselves today. The stock market tanks 600 points in one day then recovers by the same amount the next. Populist politicians make bizarre and absurd pronouncements that freak out the investment community, and consumers try to grapple with a merry go round of mixed signals and conflicting economic statistics.

The global economic outlook, in general, is not rosy, to say the least. Anemic growth in the U.S., Europe and Japan will be exacerbated by worsening trade terms, declining capital flows, illiberal protectionist policies and an appreciating dollar. The economic environment for Latin America and the Caribbean region in 2019 will be characterized by increasing uncertainty, medium-term risks, and a recovery characterized by ebbs and flows. Excluding Venezuela, GDP is projected at 2.3% vs. 3.7% for the world.

Four trends or factors will impact both the local and multinational business communities in the region in the new year:

  1. Interest rates and economic performance in industrialized nations. Taking a queue from the U.S. Federal Reserve, the European Central Bank, and other central banks, are expected to raise rates, although the percentage hikes and timing are uncertain. Such moves will increase business and consumer borrowing rates in an environment where trade and investment flows to the region from the U.S., Canada and Europe, in particular, have been slowing for the last few years.
  2. Falling demand from Asia for the region’s commodities. Despite healthy projected growth rates of China (6.2%) and India (7.3%), there will be declines in commodity purchases such as soybeans, corn, sugar, iron ore, and mineral fuels, as a result in slowing growth in the Asian region. Brazil, Argentina, Chile, Peru, Ecuador and Colombia will be impacted by this contraction.
  3. Domestic demand from lower/middle classes. The proliferation of credit, relatively low inflation rates, and major gains in poverty reduction in the region have catalyzed consumer purchasing at all income levels, especially the lower and lower-middle classes. Credit cards, e-commerce, and online lending by non-bank institutions have significantly fueled domestic demand for goods and services.
  4. Technology proliferation. Businesses of all sizes, national and multinational, will continue to harness technology—by necessity as much as choice—to improve efficiency and productivity, gather market information, enhance customer service, and expand their business. Artificial intelligence, blockchain, and a myriad of customized software are key features of this continuing technology wave where not only large providers such as Microsoft, Hewlett-Packard, and SAP service a wide range of industries, but small and medium-size firms and start-ups proliferate, as well.

Given this environment, the challenges that businesses will face in 2019 are numerous. These include greater competition from China, possible recessions in Europe and the U.S., and issues of intellectual property protection and data privacy, witness the recent Facebook debacle. For smaller firms and consumers, wider access to financing (especially for suppliers) is still daunting despite market improvements in financial access in recent years. Firms that are commodity producers will find the global business environment especially challenging. Finally, for firms of all sizes workforce availability and readiness are significant daunting hindrances. Latin America underperforms vis-à-vis nations with similar levels of GDP and education spending. The region spends more per capita than Asia but with poor results. Talent attraction and retention are no easy feats to say the least.

Despite the challenges elucidates above, microeconomics will trump macroeconomics in the new year. As previously mentioned, the growing demand in internal markets by both business and consumers, across a range of socioeconomic classes, means that a slow-down is not anywhere near a shutdown. Goods and services with that are heavily technology-based have a bright future, as technology is harnessed to boost productivity and accountability to both shareholders and customers. And with few exceptions (Venezuela, in particular) pro-market environments characterized by neoliberal economic policies will ensure a favorable playing field.

The current global environment may be described as one of volatile stability or stable volatility (witness the roller coaster performance of equity markets in recent weeks). This new age of anxiety we have entered will be with us through 2019. Astute investors, well-managed and agile firms, and savvy consumers should be able to successfully negotiate through the challenging times before us.

Jerry Haar is a professor in the College of Business at Florida International University as well as a Global Fellow of the Woodrow Wilson Center in Washington, D.C.

“Trade War with Canada: The Apex of Stupidity” by Jerry Haar

The Hill
June 8, 2018

 

Trade War with Canada: The Apex of Stupidity

Jerry Haar

Lamenting the unequal and contentious relationship between his country and the United States, the 19th-century Mexican president Porfirio Díaz remarked: “Poor Mexico, so far from God and so close to the United States.” Take out “Mexico” and insert “Canada,” and no doubt that you will be reading the mind of Prime Minister Justin Trudeau today.

It is sad, infuriating and ironic that our closest friend and ally is the target of The Troublesome Trio of Trade Protectionism—Trump, Ross, and Navarro—in their quest to erase the U.S. trade deficit. The administration’s justification for their actions, citing Section 232 of the Trade Expansion Act of 1962, is “national security,” with allowable tariff increases aimed primarily at steel and aluminum imports from Canada. (Of course, Canada is as much a threat to our national security as Monaco, Zimbabwe, or Albania.)

If there is one nation that is the least deserving of the Trump administration’s protectionist wrath it is Canada.

The size, scope, and depth of the U.S.-Canada commercial relationship alone make a trade war with our northern neighbor the apex of stupidity. To begin with U.S. merchandise and services trade with Canada, our second largest trade partner after China, exceeded $675 billion in 2017 yielding a surplus—not a deficit—of over $8.5 billion. The U.S. exports more to Canada than to China, Japan, and the U.K. combined. Trade in services alone yielded a surplus of $26 billion, with the entire trade relationship producing over 2 million jobs for Americans (9 million if direct and indirect trade and investment jobs are counted). Moreover, jobs tied to trade with Canada are in sectors such as motor vehicles, machinery, electrical equipment, and plastics—all well-paying employment. And let’s not forget that Canada is the second largest investor in the U.S. after the U.K., with equity investments of over $453 billion.

The president whines about bad trade deals and unfair competition from other nations but seems oblivious to the fact that the U.S. is not a paragon of virtue in that regard. The U.S. maintains high tariffs on politically sensitive products such as peanuts, light trucks, wool sweaters, tuna and dairy products and subjects imports to tariffs that are higher than those of a number of other nations such as Japan, Canada, and Australia. At the same time the federal government provides scores of subsidies to the private sector on goods and services, especially on farm products such as sugar; employs non-tariff barriers; limits foreign bidding on government contracts; and restricts investment from abroad in certain sectors such as transportation, communications, defense, natural resources, and energy.

Our relationship with our northern neighbor transcends commerce. To decouple trade from our other relationships with Canada is naïve and foolhardy. Canada has been the most loyal of all U.S. allies. Defense and security relations between the two countries are longstanding, well-entrenched and highly successful Canada’s role in NATO, NORAD, the Global Coalition for Counter ISIL, and shedding blood and treasure in the war in Afghanistan, not to mention collaboration in the war on terrorism and transnational crime through sharing intelligence, along with border and law enforcement cooperation, make our neighbor to the north an indispensable partner. Could anyone blame Canada if it decides to pull back from such cooperative arrangements?

Almost 400,000 people and $2 billion worth of goods and services cross our border with Canada every day. As Steve Blank and I wrote in Making NAFTA Work twenty years ago, the North American business environment is one of continuous, dynamic integration of production, services, supply chains, talent and consumer markets. Canada, Mexico, and the U.S. all produce components, sub-assembly, and final assembly crossing borders multiple times to serve customers in all three markets. Over 67% of the components of a Ford Taurus assembled in Mexico are produced by American workers with the final product shipped to the U.S. and booked as a Mexican export to the U.S.

To attempt to cure a trade deficit by imposing tariffs did not work in 1933 with the Smith-Hawley Act (in fact, it prolonged the Depression) and will not work now. There are many reasons for trade deficits, not just unfair practices. Most common are an imbalance in a nation’s savings and investment rates, a bigger government budget deficit (due to more federal spending or a huge tax cut), and a growing economy that allows people to spend more on imported goods along with greater access to credit and lower credit rates which fuel consumption.

Prime Minister Trudeau has stated that in its trade war with the U.S. Canada will make its arguments based on “logic” and “common sense.” Those are two imports the Trump administration could desperately use.

Jerry Haar is a business professor at Florida International University and a global fellow at the Woodrow Wilson International Center for Scholars in Washington, D.C.

“Are We Prepared for the Artificial Intelligence Revolution?” by Jerry Haar

Miami Today
May 31, 2018

Are We Prepared for the Artificial Intelligence Revolution?

Jerry Haar

Imagine a future where homes will be able to use the most efficient, cost-effective electronic technology where sensors in dishwashers can determine the optimum amount of water to be used to clean a certain number of dishes and regulate the intensity of the water jets based on the dirtiness of the material. That future is closer than we think—ushered in by the “fourth industrial revolution”. Coined such by Klaus Schwab, founder of the World Economic Forum, this technological revolution is fundamentally changing how we live, work and relate to one another. It is exponential, unlike the linear pace of previous ones, and includes the Internet of Things, robotics, 3D printing, biotech and nanotech, autonomous vehicles, quantum computing and, especially, artificial intelligence (AI).

AI touches all of us now in a myriad of ways and has several dimensions: (1) reactive machines which make predictions—chess algorithms are a good example; (2) limited memory that looks into the past to find patterns; self-driving cars are a case in point; (3) theory of mind whereby people, creatures, and objects can have thoughts and emotions that affect their own behavior (humanoids); and self-awareness, machines with human consciousness (we are not there yet).

In a survey by MIT’s Sloan Management Review and the Boston Consulting Group, 85% of the firms surveyed expressed the belief that AI will provide a competitive advantage. And no wonder. AI eases business operations and processes and boosts efficiency. In the financial realm, it is used by finance, credit and insurance companies as lie detectors. JPMorgan Chase’s Contract Intelligence (COiN) platform uses image recognition software to analyze legal documents, and extract important data points and clauses in seconds. FICO uses AI to build credit risk models.

Supply chain and logistics have the largest possibilities in terms of value creation after marketing and sales. Inventory management, delivery, and distribution have been improving dramatically thanks to AI. Note: UPS saves $50 million a year through process management using AI and tracking in real time optimum delivery routes. Any consumer who buys online knows how AI custom tailors marketing. For example, looking for a CD on Amazon of composer Gustav Holst’s “The Planets,” up will pop a message indicating that people who bought that CD also purchased other discs of similar early 20th century British classical composers such as Edward Elgar, Ralph Vaughan-Williams, William Walton and Arnold Bax.

The social and communication impacts of AI are not only promising but limitless. Siri, Alex and Amazon Echo are the most relatable while household chores, performed by cleaning robots, such as the Roomba vacuum cleaner, are another case in point. AI will impact transportation as well. Imagine owning a car that is out Ubering for you while you are working your regular job. In government services, AI is heavily employed in public safety, including parole screenings, crime prevention, and widespread applications in smart cities. And in healthcare patient monitoring is becoming far more efficient and effective, freeing up medical staff time for other tasks and research. Britain’s National Health Service is using computer vision algorithms to detect cancerous issues, and IBM is working with CVS health and Johnson and Johnson on analysis of scientific papers to find new connections on drug development.

None of this should imply that there are no downsides or dangers from artificial intelligence. For there clearly are–mainly losing control of AI operations due to a malfunction. A finance company can lose all its money in a fraction of a second if the machine learning algorithm it relies on for its investments malfunctions. An out of control AI automotive vehicle or a robot can be fatal, and malfunctioning medical equipment or an equipment fed with insufficient data can lead to a disaster. And since AI does not understand morality, we could wind up with lethal autonomous weapons and disappear as a species.

The most immediate threat, or rather challenge from AI, is to ensure that those whose jobs will be replaced by machines (banking, apparel, mining, low-skilled machine operators) will be retrained or “skilled up” to remain employed. While entire occupations are destined to be eliminated, research reports from Gartner and MIT estimate that rather than destroying jobs, AI will create over 500,000 jobs over the next three years. BMW in Spartanburg, South Carolina, is illustrative. Their workforce more than doubled during the last decade, as cars that once had 3,000 parts now have 15,000. More and more workers are assigned to upgraded, higher-paying work checking the final output of robots. As lower-level tech workers upgrade their skills, middle-level and higher skilled jobs will be open to them. Welding torches and hammers will be traded in for manuals that teach the basics of software coding skills.

Although AI is very expensive to implement on a large scale and costs billions of dollars and considerable time to develop and maintain, according to McKinsey, it will become a dominant feature of our 21st-century economy. It behooves us all to prepare to survive and thrive in the brave new world of artificial intelligence.

Jerry Haar is a professor and interim director of Executive and Professional Education in the College of Business at Florida International University and a global fellow of the Woodrow Wilson International Center for Scholars in Washington, D.C.

“Redirecting Capital to Sustainable Investment” by Victoria Galeano and Jerry Haar

Published in the America Economia (March-April 2018), “Redirecting Capital to Sustainable Investment” discusses impact investing among Latin American businesses. To read this article in Spanish, click here

March – April 2018

 

Redirecting Capital to Sustainable Investment

Victoria Galeano and Jerry Haar

We are living at an unprecedented time in human history. Never before have consumers been so empowered to influence corporate behavior and firms’ impact on society and the environment. New market incentives driven by selective consumer groups such as millennials and women have begun to redirect capital towards enterprises the importance of being good corporate citizens.

To be a good corporate citizen is consonant with high standards of ESG (environmental, social, and governance). Many investors consider looking for ESG-oriented firms, believing they generate higher financial returns in the long term. More and more available information validates this correlation. For example, the Institute of Sustainable Investing’s extensive study of mutual funds found that sustainable investments in most cases equal or exceed the financial performance of traditional investments.

This has generated a search for sustainable investments and transactions of “green capital” and a proliferation of funds focused on sustainable investment. For example, the market for green equities reached a new historical record of over $200 billion in total issues in 2017. According to Bank of America, $21.4 trillion of global stocks embody ESG criteria.

There presently exist diverse strategies for selecting investments that incorporate ESG. In many funds, the selection process is based on monitoring sustainability indices. These indices compile a list of enterprises and score them based on ESG criteria. In the case of Latin America, the Inter-American Development Bank utilizes Index Americas, the first index to be launched by a multilateral development bank. Index Americas selects 100 enterprises that are both the most sustainable, and have the largest presence in the region.

It is noteworthy that the Latin American financial system has slowly embraced this worldwide tendency, and increasingly, pension funds and other investment funds are incorporating sustainability investments in their portfolios. The leading stock market in Brazil already has an index of corporate sustainability, and the stock markets in Argentina, Chile, and MILA (the integrated stock exchanges of Colombia, Chile, Mexico, and Peru) are in the process of developing similar criteria. At the same time, Latin American businesses are more and more cognizant of the importance of incorporating ESG in their operations. Firms such as FEMSA, Cemex, and Banco Itaú are industry leaders in attaining high standards of ESG.

These enterprises do not only allocate resources to improve their technological systems and internal processes but also invest in broadening their knowledge base of sustainability. In response to this need, various universities have incorporated sustainability into their MBA programs.

Attaining high standards of ESG brings multiple benefits to companies and helps firms achieve larger goals in many instances. Recognizably, however, the proliferation of rankings and standards requires significant resources in the generation of reports, scorecards, and audits. Additionally, obtaining results will invariably require the reconfiguration of internal processes or investment in costly equipment and technologies.

Nevertheless, enterprises that are able to integrate ESG principles in their business models and continually improve their sustainability are those that will be able to generate long-term economic benefits while engaging in behavior that is healthy and beneficial to people, the environment, and society at large.

Victoria Galeano is the founder and director of PRISSMA, a consultancy specializing in the financing of sustainable projects and products.

Jerry Haar is a business professor at Florida International University and a global fellow of the Woodrow Wilson Center in Washington, D.C.