Multinational Organizations Best Address the Five Biggest Economic Challenges

Kalin Anev Janse, secretary general and a member of the management board of the European Stability Mechanism (the eurozone’s lender of last resort), considers five major challenges and why international organizations offer the best hope for managing them.

The Brexit vote and the U.S. presidential election outcome signal dramatic changes in cooperation globally and a push for more protectionism. In practice, these votes called into question the multilateral institutions and international collaboration among countries that embody that cooperation.

Janse says the five major challenges are: income inequality, protectionism, migration, technology replacing jobs, and social media and the “post-truth world.”

In my view, Europe can offer lessons in regional integration that are relevant for other parts of the world. Among others, my institution – the European Stability Mechanism (ESM) – is a product of European cooperation in response to the financial and economic crisis. As the largest and most active regional financing arrangement, the ESM works closely with its peers in other regions of the world.

Beyond Europe, the continued rise of Asian economies, as well as those in Latin America, present new opportunities for strengthening international cooperation in many of the areas I have mentioned, including finance, infrastructure, energy, education, climate change and others.

Portland Adopts Surcharge on C.E.O. Pay in Move vs. Income Inequality – The New York Times

The New York Times reports on a new initiative to address income inequality, based on upcoming pay ratio disclosures.

Moving to address income inequality on a local level, the City Council in Portland, Ore., voted on Wednesday to impose a surtax on companies whose chief executives earn more than 100 times the median pay of their rank-and-file workers.

The surcharge, which Portland officials said is the first in the nation linked to chief executives’ pay, would be added to the city’s business tax for those companies that exceed the pay threshold. Currently, roughly 550 companies that generate significant income on sales in Portland pay the business tax.Under the new rule, companies must pay an additional 10 percent in taxes if their chief executives receive compensation greater than 100 times the median pay of all their employees. Companies with pay ratios greater than 250 times the median will face a 25 percent surcharge.

How to fight inequality with stocks

Fascinating research, though a lot depends on who manages the ESOP, as we have seen cases where ESOP shares were used to entrench management.

New research from economist Jared Bernstein, previously the top economist to Vice President Joe Biden, finds that ESOPs actually reduce inequality a significant amount—and they might do it in a different way than anyone previously imagined.

“I went into the project thinking that ESOPs wouldn’t make much of a difference at all pushing back on inequality,” Bernstein said, “and I came out of it thinking there’s more there than I thought.”

Bernstein’s new paper, shared exclusively with POLITICO and set to be released later Tuesday morning, builds on the existing belief by economists that ESOPs reduce inequality by shifting shares of stock to people who are traditionally unlikely to hold stocks. Around 80 percent of the value of the stock market is held by the richest 10 percent of Americans while the bottom 40 percent barely have any wealth in the stock market at all. ESOPs transfer stock ownership from those who currently hold stock to those who don’t, causing capital income to be more equally distributed between the rich and poor.

But Bernstein looked at firms with ESOPs and discovered something else: they tended to have more evenly distributed wages than other firms. In other words, the gap between executive pay and the wages of low-wage workers was smaller in firms that offer some type of employee stock ownership.

via How to fight inequality with stocks.

Tax Havens Are Turning The U.S. Into An Unequal Aristocracy

Economist Gabriel Zucman is concerned about tax laws that contribute to income inequality and opportunity inequality. “There is a tipping point above which inequality becomes detrimental to growth and dangerous to society,” he said. “Nobody knows whether we are far or close from this tipping point, but it is there and it is coming.”
He recommends:

the U.S. and other large economies should impose economic sanctions on tax havens, forcing them to make up the difference in lost revenue through trade tariffs.

“The idea is that we need to change the incentives [that enable] tax havens to facilitate tax avoidance and tax evasion,” Zucman said.

Then, countries such as the U.S. should reform their corporate tax policies to geographically bind taxable profits to the location of the sales that generated them. For example, he said that if Microsoft theoretically makes 50 percent of its sales in the U.S., then 50 percent of its global profits should be taxed in the U.S.

“It’s very easy for firms to move profits to Bermuda,” Zucman said. “But they cannot move their customers to Bermuda.”

Still, Zucman said he recognizes that the political appetite for curbing tax havens is weak. None of the current crop of presidential candidates — ranging from populists (albeit of opposite political ilks) like Bernie Sanders and Donald Trump to establishment candidates like Hillary Clinton and Jeb Bush — has produced any concrete plan to overhaul the tax system, he said.

via Tax Havens Are Turning The U.S. Into An Unequal Aristocracy.

Dimon, Paid $27 Million Last Year and $1 Billion So Far, Says Income Inequality is Not a Problem Because Cars and Phones Are So Good

“Let them eat iPhones,” is basically Jamie Dimon’s Marie Antoinette-ish take on income inequality.  The rebuttal is obvious and need not be stated.  However, we would like to add as a side note that the improvements in cars and air quality are largely due to government health and safety regulation which was fought every step of the way by the corporations Dimon’s firm supports with financial services and invests in as a money manager.

“It’s not right to say we’re worse off,” Dimon said Thursday at an event in Detroit in response to a question about declining median income. “If you go back 20 years ago, cars were worse, health was worse, you didn’t live as long, the air was worse. People didn’t have iPhones.”
While income inequality is a problem, slashing CEO pay wouldn’t help, he added.
“It is true that income inequality has kind of gotten worse,” Dimon said, noting that he wants things to get better for low- and middle-class households. Still, “you can take the compensation of every CEO in America and make it zero and it wouldn’t put a dent into it. What really matters is growth.”

via Dimon Says iPhones, Cars Help Balance Out U.S. Income Inequality – Bloomberg Business.

Income Inequality by Country (Courtesy GraphIQ Feed Original Research)

The Countries with the Most (and Least) Income Equality

Guest post Ben Taylor

You’ve heard statistics about how 10 percent of America owns 75 percent of the wealth and that the top 1 percent makes nearly 20 percent of all income. But is American prosperity really so unequal compared to the rest of the world?

In order to see how America stacks up against other nations, FindTheData turned to the Gini ratio. Developed by sociologist Corrado Gini in the early 20th century, the Gini ratio describes a country’s income distribution on a scale of zero to one. A Gini ratio of zero indicates that every person in the country makes exactly the same amount of money. A Gini ratio of one means that just one person makes all the money.

The United States’ ratio? 0.41. Proportionally, this means the top 20 percent of earners make about 46 percent of the total national income.

While that might sound fairly unequal, America is actually near the middle of the pack compared to the rest of the world. Among the 88 countries we analyzed, the average Gini ratio was 0.38. For comparison, consider that Brazil’s Gini ratio is 0.53, where the top 20 percent make 57.2 percent of the wealth. South Africa’s Gini ratio is even higher, at 0.65.

Meanwhile, the countries with the most equal income distribution tend to have Gini ratios between 0.20 and 0.30, such as Sweden and Norway. That said, the top 20 percent in these countries still make nearly double their share of the nation’s income (~36 percent).

But even in countries with a high Gini ratio (and thus, high inequality), at least new generations can work hard, ascend the income ladder, and join the top 20 percent, right?

Wrong. Unfortunately, the Gini ratio is highly correlated with another metric, called intergenerational earnings elasticity. While it sounds complicated, earnings elasticity simply describes how closely a parent’s income will dictate future income for his or her child. It turns out that the most unequal countries, like Brazil, are also the most stagnant in terms of intergenerational income changes. In other words, rich families tend to stay rich, while poor families tend to stay poor.

Take Brazil’s elasticity score of 0.58. This means that if a father makes $10,000 more than average, his son will be expected to make $5,800 more than average. But the same is true on the opposite end. If a Brazilian father made an income $10,000 less than average, his son is estimated to make $5,800 less than average as a result.

Add it all up, and you get income immobility across the world. Countries with large income gaps—like Brazil and South Africa—might allow a rare individual to ascend the ranks, but the data says generations tend to fall in step with the one that came before.

Meanwhile, countries with more equal income distribution—like Denmark and Norway—allow for greater income flexibility between generations, but there’s less of a gap between the rich and poor in the first place, so generational changes in income aren’t as significant, anyway.As a final note, it’s important to maintain the distinction between income and wealth. Both the Gini ratio and earnings elasticity metric focus on annual income—a figure that can change significantly throughout a person’s life.

Consider that 61 percent of American households will count themselves among the top 20 percent in income for at least two consecutive years, even if they begin or end their lives in a much lower bracket. Married professionals tend to break this barrier in their forties and fifties, once both partners are earning a solid salary at the same time.

Contrast income with wealth, where inheritance, investments and lifetime savings all contribute to the final number. Here, American inequality is more pronounced, a product of long-term habits, family systems and life circumstance.

So is America especially unequal, when compared to the rest of the world? It depends on the metrics you pick. For income, at least, the answer is no.

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