Monday, May 6, 2013
Monday, April 29, 2013
Here is a puzzle. US unemployment remains stubbornly high by pre-recession standards at 7.6%. The overall workforce participation rate continues to fall. Real income growth remains flat. Yet retail sales go from strength to strength. Where is the purchasing power coming from?
Bernard Baumohl, chief global economist of the Princeton-based Economic Outlook Group, has an intriguing explanation. What we are seeing, he thinks, is a growing underground economy which, if it were possible to include it in the official statistics, would push unemployment down to around 5 per cent. That is where, historically, it ought to be at current levels of personal consumption.
"We're not talking about illicit activity, like selling stolen goods or drugs," Mr Baumohl wrote in a March research note that is attracting a lot of attention. "It's largely work where millions of unemployed have managed to earn cash "off the books" by repairing computers, doing carpentry or handyman work, selling goods at flea markets, tutoring, housecleaning or using their car as a private delivery service."
How much income is not being reported to the Internal Revenue Service? Something on the order of $2 trillion annually, the University of Wisconsin's Prof Edgar Feige, a leading expert on shadow economies, concluded in a 2011 paper.
That would put the gap between what the IRS is owed each year and what it actually receives at $450-500 billion, enough to halve this year's projected budget deficit , and more than the entire GDP of South Africa. The IRS’ own calculations, most recently for 2006, had the gap at $385 billion.
As dire as that sounds, several studies have found American taxpayers more likely to cough up what they owe on time than their European counterparts. The IRS reckons the US tax compliance rate was 83.1% in 2006. The Vienna Institute for International Studies has estimated compliance in the UK, France and Germany at 77.97%, 75.38% and 67.72% respectively.
A cash economy requires physical cash, obviously, and for all the talk of the US becoming a cashless society, the opposite seems true. Until recently, it was received wisdom that around two thirds of greenbacks in circulation were located offshore. Prof Feige, using previously confidential data provided by the New York Federal Reserve, demonstrated in a separate paper last year that fully 77% of US currency remains at home, roughly $750 billion or $2250 per capita.
A lot of that may really be in people’s mattresses. The Federal Deposit Insurance Corporation reported in September last year the 10 million American households – one in 12 – were entirely unbanked. Another 24 million – 20 per cent -- were “underbanked”, meaning members had deposit or saving accounts but relied on “alternative financial services” like non-bank check-cashing services and pawn shops.
If Baumohl is right, and growing numbers of Americans are operating in what Prof Feige prefers to call the “unreported” economy, is this a cyclical product of recession or structural, and if structural, what’s driving it? Are people bailing from the formal economy because they want to or because they have to? Here the debate heats up.
Certainly it has become cheaper for employers to rely on independent contractors responsible for their own pension contributions, Social Security taxes, health insurance and the like. The New Yorker’s James Surowiecki cites a recent survey of 300 000 California construction firms which found that fully two-thirds had no employees even though most clearly gave work to many.
However, there is little incentive for a legitimate company that hires independent contractors to hide what it pays them from the authorities. Such payments, to be deductible from the company’s taxable income, must be reported to the IRS on Form 1099 – which the taxman then uses to make sure contractors also pay what they owe.
John Mauldin, a well-known financial commentator to the right of spectrum, advances a provocative theory in his latest Thoughts from the Frontline newsletter. He sees a connection between the underground economy, the minimum wage and swelling welfare rolls.
Welfare recipients, he argues, have an incentive to work off the books in order to remain eligible for income support and free healthcare.
“If you have a skill that pays you $20-30 an hour (closer to the median family income pay level) you are better off keeping the job and staying off welfare. But if you are minimum-wage labor ( around $10 an hour) or not far above it, the equation works out better if you work off the books for that extra income.”
Saturday, April 27, 2013
The good folks at the New Yorker hotel upgraded me to a room with a balcony on the 38th floor when I checked in on Friday for the South African consulate's Freedom Day celebration up the road at the Marriot Marquis on Times Square. This was the view to the east. Below is the view to the south that night. I always take the train to New York from Washington and if I am overnighting will try to stay near Penn Station. I like the New Yorker or the Affinia, both old but recently renovated. The Hotel Pennsylvania is an option faute de mieux, but the sheets are thin, the plumbing dodgy and the bed bugs legion.
Sunday, April 21, 2013
In 1821, the captain of a US warship off West Africa ordered his crew to seize a schooner, La Jeune Eugenie, for transgressing Congress' ban on the international transport of slaves.
The French owners demanded their boat back protesting they were not subject to American law. US Supreme Court Justice Joseph Story, an ardent foe of slavery, ruled against them, but not without misgivings. What gave him pause was the idea of the US assuming the role of global policeman.
"No nation has ever yet pretended to be the custos morum (guardian of the morals) of the whole world," he wrote.
Chief Justice John Roberts quoted these words approvingly last week as he drove a stake through the heart of the US Alien Tort Statute (ATS), or, more precisely, the interpretation of it that has encouraged lawyers for victims of injustice everywhere -- from Latin America to Africa to East Asia -- to treat American courts at the ultimate custodes morum.
While split 5-4 in their reasoning, Justice Roberts and his eight colleagues ruled unanimously that a federal court in New York had no business hearing Kiobel vs. Royal Dutch Petroleum, a case brought by members of Nigeria's Ogoni community alleging Shell's complicity with government atrocities in Nigeria's oil patch.
This was good news for MTN. Turkcell is relying heavily on the ATS in its vendetta against the South African telcoms giant for winning Iranian business to which Turkcell feels more entitled. Less pleased is the Khulumani Support Group whose quest for apartheid reparations from Ford, IBM, Daimler and others may now be at an end.
Its origins mysterious, the ATS has been called the Lohengrin of American law. Adopted by the first Congress as part of the Judiciary Act of 1789, it states that federal courts "shall have original jurisdiction of any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States".
For the next 191 years, the ATS was largely forgotten. Then, in 1980, a federal appeals court in New York agreed that it conferred on a Paraguayan torture victim the right to sue his torturer in the US.
That opened the door to a slew of litigation, including, from 2002 on, efforts to obtain billions of dollars from companies all over the world for abetting apartheid. These suits were opposed by President Mbeki as an assault on South African sovereignty, but encouraged under his successor.
What Congress seemed to have had in mind in 1789, Justice Roberts wrote, were a couple of embarrassing incidents -- one in 1784, the other in 1787 -- in which French and Dutch envoys were subjected to indignities in the US from which the "law of nations" was supposed to protect them.
So, on its face, the ATS exists simply to clarify the legal procedure to be followed in such cases: you're a foreign ambassador covered by treaty and international law, someone does you a harm, federal court is where you go to be made whole. Nothing in the statute says it applies in equal measure to torts committed on and off US soil.
Relying on the Supreme Court’s own precedents that no law can be enforced extraterritorially unless Congress specifically says so, Justice Roberts found that the ATS does not give federal courts jurisdiction over violations of international law committed outside the US.
"There is no indication that the ATS was passed to make the United States a uniquely hospitable forum for the enforcement of international norms," the Chief Justice held. It was implausible, he continued, that the fledgling American republic, in desperate need of allies, would have recklessly declared itself the world's first "custos morum".
Debate continues on how hard the Supreme Court has shut the door on ATS cases like the apartheid reparations and MTN matters. In both the judges suspended proceedings until the Supremes ruled on Kiobel. It will be interesting to see whether they now dismiss or agree to test whatever wriggle room the decision has left.
At minimum Turkcell and Khulumani would have to persuade the courts that a substantial portion of the criminal acts they allege occurred in the US. That could be hard.
Khulumani's Marjorie Jobson does not sound hopeful, writing on the organisation's website: "One last hope...seems doomed to be extinguished through the triumph of corporations in asserting their power to influence the courts".
Turkcell didn't sound quite so ready to admit defeat, noting enigmatically that it had "already provided the US district court with a detailed description of MTN's extensive business dealings in the US supporting personal jurisdiction."
Tuesday, April 16, 2013
Business Day called the morning after asking for a quick 600 word oped. Here's the not terribly wonderful result:
Beyond the lives and limbs shattered in Monday's Boston Marathon bomb blasts it was far easier to see what didn't happen than to know what did.
A little boy's life cut short because he was there at to hug his father at the the end of the race; his sister left an amputee; his mother's brain damaged by flying debris or deliberate shrapnel. To think on these things is to stifle a sob.
That said, with three dead, total casualties edging slowly towards 200 and the city's physical fabric relatively unscathed, this was not what happened 300 kms to south in New York on September 11, 2001. That day Islamic jihadis left 3 000 dead and triggered what was as much of a turning point in American history as December 6th, 1941, Pearl Harbor.
Nor was this April 19, 1995, in Oklahoma City, when Timothy McVeigh, a creature from America's strange paranoid fringe, detonated 2 200 kgs of ammonium nitrate -- fertiliser -- outside the Murrah Federal Building, killing 162.
Nor was this what happens almost daily on the streets of Baghdad, Damascus and Kabul, leaving mutilated bodies to be counted in double and triple digits.
If April 15, 2013, found an immediate echo anywhere, it was July 27, 1996, the day another homegrown extremist, Eric Robert Rudolph, tried to disrupt the Atlanta Olympics with a pipe bomb that left one dead -- a mother who had brought her daughter to the games as a birthday present -- and 100 wounded.
Rudolph, when he was finally caught in the Appalachian mountains in 2003, said he had meant to bring the Olympics to a halt to protest the legalisation of abortion.
The Games went on. So, next year, will the Boston Marathon as much of an international institution in it own way as the Olympics -- to which the flags that that fluttered on the endlessly replayed blast footage bore eloquent testimony.
The tragedy will be marked, the victims remembered, at least for a few years, but memories will fade as they did in the Atlanta case.
Which is as it should be, in many ways. The perpetrators of such acts do not deserve the satisfaction of thinking they have earned an indelible spot in the public's consciousness.
In that respect, President Obama's measured statement on Monday afternoon was apt. Presidents are expected to hold the nation's hand at moments like this, to comfort the grieving and assure them that justice will be done, but this president clearly did not want whoever was responsible to get a kick out of interrupting his day.
Obama avoided calling the bomber(s) terrorist(s). To do so would have been to allow that they had inspired terror and thus succeeded, however briefly, in achieving some sort of mastery.
The Boston bombs went off just as I was boarding Jet Blue flight 197 from New York to Chicago. The Embraer 190 came equipped with tv screens on the back of every seat. Throughout the flight, passengers were able to watch continuously looped blast footage and listen to the breathless commentary that accompanied it on the news channel of their choice.
You might have expected the sight of bombs going off and reports of heightened security in cities and airports to create a bit of a buzz aboard a packed aircraft. But no one seemed very exercised. Most found reruns of Friends or whatever they had on on their Kindles more to their taste.
As of yesterday morning on the US east coast, the identity and purpose of whoever placed the bombs remained a matter of conjecture, but there was one intriguing coincidence to conjure with: April 15 was not only Patriot's Day in Boston -- the public holiday on which the marathon is always run -- it is also the federal tax filing deadline, an infamous day for the paranoid American fringe who think government is coming in black helicopters to take away their guns.